The index tracking the price return of the outstanding catastrophe bond market has risen again in the last fortnight and at its fastest rate so far in 2013. After a small dip a week ago, likely caused by the large amount of capital interested in catastrophe bonds and ILS as an asset class, the index bounced back sharply in the past week. The market has been seeing steady rises so far this year but at the same time issuance conditions are extremely attractive to sponsors.
It’s time for another of our regular looks at the Swiss Re Cat Bond Performance Indices, to see what they can tell us about pricing and returns in the secondary market for catastrophe bonds and the markets general sentiment. So far this year has seen a slower, but steady, rise in both of the indices we follow. The price return index continues to recover from the mark-to-market losses that last years hurricane Sandy caused, while the total return of the outstanding cat bond market continues to rise alongside the markets growth, as we discussed in our last article on these indices here.
2013 has so far avoided the steady decline in price returns that we saw a year ago, likely due to the much lower issuance of new cat bonds so far this year. However, capital inflows to the sector continue to be high and some ILS fund managers continue to report difficult conditions in the secondary market as competition can be high for positions making trading difficult for some, particularly for those with diversification in mind.
The continued inflows of capital along with a high investor interest and demand for cat bond positions has led to very attractive conditions in the primary cat bond issuance market. Evidence of this could clearly be seen in the latest deal to come to market, Caelus Re 2013 Ltd., which upsized during marketing and saw its pricing drop twice to a level that looks like it makes the deal extremely good value for the sponsor.
However, despite the attractive issuance conditions the market remains quiet for the time of year. By this time in 2012 we had already seen seven or eight transactions be launched, but so far this year we only have three new transactions listed in our Deal Directory with one of them being a private ILS deal. Sources tell us to expect more deals imminently and for investors they cannot come quickly enough as demand for cat bond notes is far outstripping supply right now.
So, first we look at the Swiss Re Global Cat Bond Performance Price Return index, which tracks the price return for all outstanding USD denominated cat bonds (which you can quote and chart through Bloomberg here). This index saw a slight dip in the week ending the 22nd February, but then recovered strongly in the last seven days. The index closed at 95.49 on the 28th February, giving the price return index a 0.29% rise in the last fortnight, but it managed 0.34% in the last seven days alone which is a strong bounce for the price return index. For the month of February as a whole the price return index rose 0.57%.
Next let’s look at the Swiss Re Global Cat Bond Performance Total Return index, tracking the total return of a basket of natural catastrophe bonds (which you can quote and chart through Bloomberg here). This index has continued its upwards trajectory and in the last week it rose strongly. It closed at 246.35 on the 28th February, a rise of 0.61% in the last fortnight and a rise of 1.2% for the month of February as a whole. That’s better than the just over 1% rise that total returns saw in January and could point to February being a better month for ILS funds with more cat bond exposure.
The future trajectory for these indices will depend a lot on primary cat bond issuance. If we suddenly see a flurry of new cat bond deals come to market the price return index could decline as interest from investors goes to the primary deals, while secondary mark trading becomes more restricted to those looking to balance portfolios. However if primary issuance remains slow these indices will likely both rise further in the next two weeks.
We’ll return to these indices regularly to update you as the year progresses.
The total-return of the catastrophe bond market as measured by these indices was over 10% in 2012.
Don’t forget to answer our anonymous poll to tell us what volume of catastrophe bonds you think will be issued in 2013?