Swiss Re Insurance-Linked Fund Management

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Seasonality and supply continue to depress catastrophe bond indices


Both the price return and total return of the outstanding catastrophe bond market have been depressed in recent weeks by the onset of seasonality and a glut of supply in the secondary catastrophe bond market. The indices we track tell the story of a gradual slide in both metrics as the U.S. hurricane season began and seasonal price trends came into play, albeit a little later in the year than normal.

Typically, seasonality begins to rear its head on cat bonds by late April or May, largely due to the impending U.S. wind season, and we often see a relatively steep dip in the various cat bond indices before the hurricane season begins. This year, because the indices had been buoyed by increased interest from investors seeking to put capital inflows to work when opportunities were more scarce, secondary cat bond prices had been inflated and the seasonal dip took a little longer to kick in.

The price return of the outstanding cat bond market had risen strongly right up to the middle of April before beginning a very slow decline. That steady decline continued into June, when we last covered the cat bond indices and has now accelerated over the last month, resulting in some more attractive pricing in the secondary market. Further demonstrating the appetite investors have for ILS and cat bonds right now, we understand that investors have continued to buy U.S. wind exposed cat bonds, even at prices above par, right into the start of the hurricane season.

The other factor that has helped to stimulate the return of seasonality has been the continued strong primary issuance into the months of June and July, which is quite unusual as issuance has always tended to peak by the end of May historically. This continued issuance activity has helped to soak up some investor demand but has also led to many investors needing to trade to maintain portfolio diversification, thus increasing supply in the secondary market. This has allowed, or forced, the trading dynamic in the secondary cat bond market to return to more normal patterns, with investors either capitalising on mark-to-market gains made earlier in the year or offloading positions to balance portfolios, assisting the decline in pricing of outstanding cat bonds.

So, 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. When we last covered this index a month ago it stood at 95.74 on the 7th June. At its latest close, on Friday 5th July, the index had dropped further to 95.16, a decline of just under 0.61% over the last month. Further slow declines are likely as we move through thee peak of the U.S. wind season, after which some recovery is expected to begin.

Swiss Re Global Cat Bond Performance Price Return Index

Swiss Re Global Cat Bond Performance Price Return Index

Now we turn to the Swiss Re Global Cat Bond Performance Total Return index, which tracks the total return of a basket of natural catastrophe bonds. On the 7th June this index stood at 252.73 and had continued a slow rise up to that point. Now, at its close last Friday on the 5th July, this index has declined for two consecutive weeks, to now sit at 252.74. It had risen to 252.91 on the 21st June, but in the last fortnight has declined by 0.07%. There will be some element of month end calculations which affected this index at the end of June, but clearly seasonality has now begun to impact the total return of the outstanding cat bond market. It will be interesting to see which way this index travels in the coming weeks.

Swiss Re Global Cat Bond Performance Total Return Index

Swiss Re Global Cat Bond Performance Total Return Index

We’ll be back to review these indices again in another two weeks. It will be interesting to see whether any developments in the tropical Atlantic from the 2013 U.S. hurricane season have any impact on index performance as well as whether seasonality continues to depress secondary cat bond prices. We would at least expect U.S. wind exposed cat bond spreads to tighten as the hurricane season progresses.

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