Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Secondary market catastrophe bond price returns continue to fall


It’s been just over three weeks since we last looked at the Swiss Re Cat Bond Performance Indices to see what they can tell us about the movements in pricing and returns of outstanding catastrophe bonds and the general sentiment of the cat bond and insurance-linked securities marketplace. The last time we looked at the indices they showed price returns of outstanding cat bonds were still declining and as expected that trend has continued as primary market issuance volume has remained high.

Price returns of outstanding cat bonds have been declining steadily since the second half of 2011 when issuance began to pick up after the lull in the primary market abated. With primary cat bond issuance volume remaining high, this trend continues as investors utilise the secondary markets more as a way to balance their portfolios than to acquire positions in the sector. There has also been a trend for some investors to sell secondary cat bonds to free up capital for primary deals. The secondary market has truly become a secondary concern for many as investor have jostled to get in on new cat bond deals. The latest of these deals to come to market include the record breaking $750m Everglades Re Ltd. and the $400m Mythen Ltd. which are both due to complete soon.

Issuance in the primary market is expected to pick up again in the run up to the U.S. hurricane season and we could see a number of additional transactions come to market during May (if pipeline rumours are correct). At some point though, the price return index will stabilise as it finds an equilibrium point where price returns cannot decline any further without too much value being lost. It’s thought by many that it will stabilise within the next two months. As we’ve said before, the currently depressed prices of outstanding cat bonds do offer some value to new investors in the sector so we could see some opportunistic spikes in volumes traded.

So, first we look at 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). The steady decline of price returns continues with the index dropping to 92.11 at its close on the 27th April, the lowest point since late August 2009.

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, tracking the total return of a basket of natural catastrophe bonds (which you can quote and chart through Bloomberg here). As expected during a time of a high volume of issuance the total return of the outstanding catastrophe bond market has risen further to a new all time high. This index will certainly rise further as the latest transactions complete bringing over $1 billion of additional risk to the outstanding cat bond market. The total return index closed at 220.62 on the 27th April.

Swiss Re Global Cat Bond Performance Total Return Index

Swiss Re Global Cat Bond Performance Total Return Index

We don’t expect any dramatic change in the indices over the next few weeks. The point at which we could see some change in direction will be at the end of the month when U.S. hurricane cat bond issuance is expected to slow and price returns are expected to begin to show some signs of recovering some of the ground they have lost. We’ll update you towards the end of May.

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