Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Secondary catastrophe bond indices rise further despite primary issuance


The catastrophe bond indices which we track every fortnight here on Artemis have both continued to rise over the last two weeks. The total return index tells a story that will please insurance-linked securities and cat bond fund managers as it shows that attractive cat bond market returns continue. The price return index has not risen as quickly as in some recent weeks, and its rise is now certainly being tempered somewhat by new cat bond issuance.

The primary cat bond market has picked up in issuance through March and into April and a number of deals have completed at increased sizes and with very good pricing for the sponsors. Details on every catastrophe bond transaction can be found in our Deal Directory. This has helped to take a little pressure off the secondary cat bond market, hence the slightly slower rise in price returns since we last looked at these indices a fortnight ago.

However, as we wrote yesterday here, while primary issuance has helped secondary cat bond market liquidity, ILS fund managers continue to see unseasonal price gains on secondary cat bonds which are helping to keep returns higher than perhaps expected for some managers with large cat bond components to their funds. The reason for the unseasonal price movements continues to be an abundant supply of capital into the cat bond and ILS space, with primary cat bond issuance still not sufficient to mop up excess capital enabling secondary cat bonds to trade well above par in some cases.

So while the price return index shows signs of beginning to be tempered by the increase in primary cat bond issuance, it still isn’t enough to reverse the strong price gains on many secondary cat bond notes. The next couple of months cat bond issuance, in the run up to the mid-year renewals, will be key. If issuance volume is strong we could see the price return index revert to a more typical seasonal pattern, if issuance volume is not strong enough we could continue to see unseasonal price gains for another few weeks in the run up to the hurricane season.

So, let’s look 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 cat bond market’s general sentiment.

First the Swiss Re Global Cat Bond Performance Price Return index, which tracks the price return for all outstanding USD denominated cat bonds. This index has risen slowly again over the last fortnight, from 95.71 on the 29th March to 95.85 on the 12th April, a rise of just 0.15% a slightly slower rate than the two weeks before which saw a 0.22% increase. The future for this index will be largely driven by secondary price gains, a feature of 2013, and a slow rise is possible again in the coming weeks.

Swiss Re Global Cat Bond Performance Price Return Index

Swiss Re Global Cat Bond Performance Price Return Index

Now let’s turn to the Swiss Re Global Cat Bond Performance Total Return index, tracking the total return of a basket of natural catastrophe bonds. This index has continued its healthy gains, a pleasing fact for cat bond investors right now. When we last looked it had reached 248.64 on the 29th March, at its most recent close on the 12th April it had jumped to 249.8, a rise of 0.47% so a slightly slower rate of increase to the 0.56% gained a fortnight before. Again, an upward track is expected to continue for the total return index but its rate of increase could depend on primary issuance.

Swiss Re Global Cat Bond Performance Total Return Index

Swiss Re Global Cat Bond Performance Total Return Index

It’s been a difficult year to forecast where these indices will go next, but the main takeaway for investors is that the unseasonal gains that have been a feature of 2013 could continue right up towards the beginning of the hurricane season unless primary cat bond issuance volume jumps.

If enough primary issuance comes to market to satisfy cat bond investors and soak up a lot of the excess capital then prices should drop back on many of the U.S. wind exposed cat bonds which have seen unseasonal price rises. If issuance volume isn’t sufficient then these price declines may not kick in until into the hurricane season. It’s impossible to call right now.

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?

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