Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Secondary catastrophe bond price return rises accelerate in February


Over the last two weeks the index we follow that tracks the price return of the outstanding catastrophe bond market has risen at a faster rate, after the start of the year began a little sluggishly. 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 two weeks ago, the price return index had experienced very slow growth through January and the secondary market had been quiet in terms of trading volumes. In that last article we discussed higher competition for secondary cat bond positions potentially keeping prices a little more subdued, as investors currently have cash-on-hand having been disappointed by primary issuance so far in 2013.

Anecdotal evidence from some ILS investment fund managers shows that secondary cat bond positions have been hard to come by so far this year. The lower than expected issuance, along with strong capital inflows and capital returned from maturing cat bonds, have left some fund managers with excess cash to put to work.

With the primary cat bond market quiet the focus switched to secondary cat bond positions, but managers have been reluctant to sell positions, feeling that they need to hold onto them and try to acquire more to deploy capital. This has led to a bit of an impasse with opportunities to purchase secondary cat bond notes scarce and managers reluctant to lose any positions they already had. Combine these market conditions with seasonal strengthening of European windstorm bonds and it’s easy to see why there has been a slight uptick in price returns.

First we turn to 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 95.21 on the 15th February, a gain of 0.27% in the last two weeks which is almost as much as the index made over the whole of January. Whether it will continue to grow at this rate is uncertain and a lot of the trajectory of this index will be determined by how the primary issuance market for cat bonds develops over the rest of this quarter.

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 finished up at 244.86 on the 15th February, which is a rise of just under 0.60% in two weeks. That’s a healthy return for a two-week period if it can be carried on through the rest of the month and should signify a good months total return for ILS fund managers with catastrophe bond exposure. We’d expect total returns to continue to rise as long as there are no significant catastrophe events.

Swiss Re Global Cat Bond Performance Total Return Index

Swiss Re Global Cat Bond Performance Total Return Index

With no issuance in the primary market we would expect this pattern of slow gains for price returns and seasonal gains for total returns to continue for the moment. This could all change, perhaps dramatically, should the primary cat bond issuance market suddenly spring to life. Market rumours suggest at least one cat bond should begin marketing before the end of February and that others are being prepared, however at the moment the chances of issuance becoming so strong that it negatively affects these indices (as we saw in early 2012) looks a way off.

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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