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. When we last looked a fortnight ago gains for both indices had slowed in the new year and this trend has continued through January, particularly with respect to the price return index which has been extremely sluggish.
Both of the cat bond indices had been in recovery mode for much of the last month of 2012, clawing back the mark-to-market impact caused by hurricane Sandy. By the end of December both indices looked set to grow strongly into 2013, but in reality the lull around Christmas seems to have been carried through January with growth slower for both of them.
One cause of this slower growth has been the uncertainty surrounding the hurricane Sandy insurance industry loss estimate, but that is now becoming more certain since PCS issued its latest update and increased the loss estimate to $18.75 billion. The other reason for these indices appearing sluggish could be down to the increased competition for some secondary cat bond positions, as a number of investors failed to have their appetites satisfied by a slightly disappointing primary market in December and also now in January.
With investors cash rich, having been unable to deploy some fresh capital inflows into primary issuance as they had hoped, the secondary markets see more competitive bid activity as certain investors look to complete their diversification using secondary positions.
So first let’s 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 has been the most sluggish through January, barely gaining any ground at all. It closed at 94.95 on the 1st February. To give you an idea of just how sluggish the price return index has been, it gained just 0.27% over the whole month of January and just 0.13% in the last two weeks, much lower than perhaps expected given this index has not recovered to pre-Sandy levels. It is possible that price returns may stagnate for a while until primary issuance is kickstarted, however if the primary market became very busy later this quarter it could cause this index to decline as it did last year when primary deals became the focus.
Now we turn to 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 continues to gain, albeit at a slightly slower rate than seen at the end of 2012. At its latest close on the 1st February the index was at 243.40, which is an increase of 0.46% in the last fortnight. Over the course of January as a whole the cat bond total return index rose 1.02%. So the total return of the outstanding catastrophe bond market continues to make good headway, although at a slightly slower rate than before Sandy struck.
So, similarly to the start of 2012, we’re seeing a different pattern emerging for the cat bond price return index. As in 2012 it could be explained by the state of the primary issuance market and the capitalisation of the ILS space, although conversely to last year we currently have no real primary issuance occurring.
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.
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