Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Catastrophe bond price returns continue slow slide


The price return of the secondary catastrophe bond market continues to slide slowly down from its recent peak now that supply and demand for outstanding catastrophe bond notes appears to have levelled off somewhat. A combination of returning seasonality and a levelling off of supply and demand dynamics has seen the index we track decline slightly in recent weeks.

We started to see a bit of a wobble in the price return of the outstanding cat bond market at the end of April. That wobble became more pronounced in May and led to a slow decline in the cat bond price return index which continues today. It began with the strong primary issuance combining with an element of seasonality returning to secondary cat bond prices which helped to exert some pressure on prices allowing them to slide.

Some investors are now suggesting that the supply and demand dynamics in the cat bond market, between primary issuance and the need to offload or acquire secondary marks, have become more balanced in recent weeks and this has stimulated the slow decline in the price return index.

Primary issuance continues apace since we last wrote about the Swiss Re Cat Bond Performance Indices which will help to drive the total return of the outstanding cat bond market even higher. In the last few days three new catastrophe bond deals have come to market. This is perhaps a little unusual given the fact that we have entered the U.S. hurricane season which tends to slow the cat bond market.

It’s testament to the continued high interest in cat bonds and catastrophe risk as an asset class that sponsors have chosen to issue diversifying deals at this time of year. The three new deals are; Tramline Re II Ltd. from Amlin, Green Fields II Capital Ltd. from Groupama and Queen Street VIII Re Ltd. from Munich Re.

As expected, ILS investment fund managers had their best month of the year so far in April, and their best month April since 2007 assisted by the unseasonal price increases pushing returns up for ILS funds. We don’t expect May to be quite so good, although the majority of ILS funds will see a positive fifth month of the year.

First lets look at the Swiss Re Global Cat Bond Performance Price Return index, which tracks the price return for all outstanding USD denominated cat bonds. When we last looked the index had declined down to 95.85 on the 17th of May. Since then it has slid further, although at a slower rate, closing at 95.74 on Friday 6th June, a decline of 0.11%. For the month of May the price return index declined by 0.32%. The pattern of declines may continue for a few more weeks as the hurricane season progresses.

It’s worth noting that there has been no noticeable drop in this index related to the U.S. mid-west tornado events, including Oklahoma, despite the potential for that event to threaten some cat bond subordination layers. That is actually quite encouraging as in the past we have seen this index drop quite dramatically after events which did not really stand a chance of triggering any outstanding cat bonds. Perhaps this is a sign of the increased maturity within the cat bond investor base?

Swiss Re Global Cat Bond Performance Price Return Index

Swiss Re Global Cat Bond Performance Price Return Index

Next let’s look at the Swiss Re Global Cat Bond Performance Total Return index, which tracks the total return of a basket of natural catastrophe bonds. When we last looked, this index sat at 251.82 having seen a very small decline at the 17th May index calculation point. At its latest close on the 6th June the index was up by 0.36% to 252.73 so we suspect the decline may have been, as we said before, due to the maturation of a large cat bond and its removal from the index although we can’t be 100% sure that this was the reason.

For the month of May the total return of the outstanding catastrophe bond market as measured by this index was approximately 0.39% which is much lower than the 1% plus returns seen in other months of this year. That does suggest that ILS funds with large cat bond components to their funds will not have seen such attractive returns for May, although perhaps this is more typical for this point of the year.

Swiss Re Global Cat Bond Performance Total Return Index

Swiss Re Global Cat Bond Performance Total Return Index

So while the slide in price returns has continued, and the total return of the secondary catastrophe bond market has slowed somewhat, the pattern is still positive and much more typical for the time of year. It will be interesting to see what effect the continued strong primary issuance will have on these indices when we next visit them. It will also be interesting to see whether any developments in the tropical Atlantic from the 2013 U.S. hurricane season have any impact on index performance.

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