Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Secondary catastrophe bond price returns dip in recent weeks


The secondary catastrophe bond market has begun to see some pressure exerted on certain outstanding cat bond price returns in the last couple of weeks as an element of seasonality returned to the market and the strong primary issuance also took some focus off secondary prices. Cat bond price returns had been rising strongly, helped by unseasonal price rises and extremely strong investor demand through the first few months of 2013.

Primary cat bond issuance has been much stronger in recent weeks, with 2013 issuance now over $3.2 billion according to the deals completed and still in the market which we’ve recorded in our catastrophe bond Deal Directory. This has had the effect of slowly removing some of the upward pressure on secondary cat bond prices, which has seen notes changing hands at above par only days after an issuance completed, such was investor demand.

Also, we understand from some investor contacts that there are the beginning of seasonal influences being seen on some U.S. wind exposed cat bonds. Normally these bonds begin to feel the effects of seasonality much earlier in the year but, due to the strong demand and high inflows of new capital into the cat bond market, it is only in recent weeks that this effect has begun to affect pricing.

So, it’s time for another 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. When we last looked at these indices in mid-April the price return index had risen more slowly, as new issuance levels began to temper the upward pricing pressure, and the total return index had continued its typical upwards rise.

First 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. This index has experienced a decline over the last two weeks. On the 19th April it reached a high point for the last year of 96.13 but at its most recent close on the 3rd of May it had dropped down to 96.03, a 0.1% decline. The price return index is still about 0.21% higher than it was a month earlier and for the month of April it managed around a 0.4% gain, so while seasonality seems to have kicked in it hasn’t had a significant impact on prices yet.

Swiss Re Global Cat Bond Performance Price Return Index

Swiss Re Global Cat Bond Performance Price Return Index

Next let’s look at the Swiss Re Global Cat Bond Performance Total Return index, tracking the total return of a basket of natural catastrophe bonds. As would be expected in a time of robust new issuance the total return index keeps climbing. For the month of April this index gained 1.15%, a very healthy increase which shows that investors with large allocations to catastrophe bonds will have experienced attractive returns for the month once again. The index has actually seen a very slight dip in the first few days of May. it closed at 251.5 on the 3rd May, but on the 30th April was calculated at 251.51 by Swiss Re. It’s possible that this is due to seasonal price declines, but equally it could be an end of month anomaly, so we won’t read too much into this until we have more data in another few weeks and return to look at these indices again.

Swiss Re Global Cat Bond Performance Total Return Index

Swiss Re Global Cat Bond Performance Total Return Index

We’ll be back to look at these indices again in  another fortnight at which time the effects of seasonality should be more apparent as we move close to the start of the 2013 U.S. hurricane season. As we get closer to the start of the season we would expect to see much more downward pressure appearing on U.S. hurricane exposed catastrophe bonds, and given that U.S. hurricane accounts for around 70% of the secondary cat bond market any seasonal price declines should become very obvious in these indices.

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