Our regular readers will be aware that we follow the movement of the Swiss Re Cat Bond Performance Indices to see what they can tell us about the movements in pricing of outstanding catastrophe bonds and the general sentiment of the cat bond and insurance-linked securities marketplace. Since the 4th quarter of 2011 the price return index has been on a slow decline as primary market cat bond issuance has been high, there were ten deals in Q4 2011 and have now been nine cat bond and ILS transactions already in 2012.
As we’ve noted before, a knock-on effect of high primary market cat bond and ILS issuance is a decline in activity in the secondary cat bond and ILS markets, as investors set aside capital for the new transactions and as a result demand for secondary positions lessens somewhat. This can result in pressure on secondary market prices and as a result the index tracking outstanding cat bond price returns has declined. The decline in price returns is expected to slow towards the end of this quarter and it seems that this effect is already taking effect as although the index has dropped further since we last reported on it two weeks ago, the decline has slowed significantly.
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). As we said above, the last fortnight has seen the index decline but at a much slower rate than in previous weeks. We hear that some demand is returning in the secondary market as investors have been deploying capital into many U.S. wind positions in new cat bonds and as a result are looking for secondary cat bond diversification opportunities. This index closed on the 9th March at 92.58 which is actually the lowest point the price return index has seen since September 2009. How much lower it can go we’ll have to wait and see.
Next 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 has continued to climb in recent weeks, apart from a steep drop three weeks ago when the price returns dropped the most in a single week. In the last fortnight the total return index has risen steadily and it closed on the 9th March at 219.18 which is another all time high for total returns. This upwards trend should continue as the high issuance volume currently outstrips the maturing of old cat bonds at this time of year.
We’ll update you again on the indices in another fortnight and will likely have some commentary on the secondary market coming in the interim period from some of the ILS fund managers.