Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Seasonality begins to slow rise of catastrophe bond price return index


Our regular readers will be aware that we’ve been following the unseasonal price rises in the secondary catastrophe bond market with interest. Outstanding cat bonds have seen price returns continue to rise well into the U.S. hurricane season which is very unusual. Here’s our latest fortnightly look at the Swiss Re Cat Bond Performance Indices (our last article here) to see what they can tell us about movements in pricing and returns of outstanding catastrophe bonds and the general sentiment of the cat bond and insurance-linked securities marketplace.

Normally, the price return index slows its gains from May onwards but this year it has been rising strongly all the way through June and into July. There is a sign in its latest close that the unseasonal gains may be beginning to slow down and the index has gained less in the last seven days.

The unseasonal price return increases, which have seen the price return index gain a decent percentage through the end of May and June, has given insurance-linked securities fund managers and investors an unexpected opportunity to achieve a better returns through the last two months than they normally would. This is helping ILS funds and investors recoup some of the losses, or lower returns, they made through the beginning of 2012 when price returns declined steadily as the market accommodated new inflows of capital and saw higher than normal primary cat bond issuance. The ILS investment community will take the next few weeks to balance portfolios and consolidate returns before they begin to look towards an expected busy end of the year when primary issuance picks up once again.

Since our last update on these indices one new public catastrophe bond transaction has come to market in the form of Queen Street VI Re Ltd. from regular sponsoring reinsurer Munich Re. We’ve also seen one private transaction as Towers Watson facilitated another Oak Leaf cat bond deal with Oak Leaf Re Ltd. 2012-1.

Now we turn to the indices starting with 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 closed at 93.23 on the 6th July. As you can see from the graph below its rise in the last week is markedly slower than the few weeks prior, this could be a sign that seasonality is beginning to take effect and any rises in the next few weeks may be lower as well.

Swiss Re Global Cat Bond Performance Price Return Index

Swiss Re Global Cat Bond Performance Price Return Index

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 its rise, as is expected, to hit another high of 227.22 at its latest close on the 6th July.

Swiss Re Global Cat Bond Performance Total Return Index

Swiss Re Global Cat Bond Performance Total Return Index

It’s clear from these indices that investors and ILS fund managers will have had another good month in June, achieving above average returns for the time of year. Whether that will continue into July is uncertain, but we expect the price return index to slow and investment returns to be more seasonal. The real test for the indices over the next few months will be a hurricane that threatens U.S. landfall, but currently the Atlantic basin is quiet with no sign of tropical weather on the way.

We’ll update you again in another two weeks on the status of these indices.

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