Catastrophe bond indices dip after Friday’s earthquake in Japan

by Artemis on March 14, 2011

The Swiss Re Cat Bond Performance Indices dipped sharply at pricing late on Friday. It’s assumed that the dip is due to downward pressure caused by nervousness after the Japanese earthquake event which occurred earlier that day. Here’s our latest monthly look at the indices showing the downward movement.

The cat bond market has seen a healthy start to the year with a number of catastrophe bond transactions completing and upsizing significantly from their original values they were marketed at.

Friday’s earthquake and tsunami in Japan have put a number of cat bond deals at risk of losses. It’s very difficult to tell which bonds are likely to suffer a loss at this time but we’ve put together some information which makes it a little clearer.

First, we look at the Swiss Re Global Cat Bond Performance Price Return index, tracking the price return for all outstanding USD denominated cat bonds (which you can quote and chart through Bloomberg here). This index declined noticeably at the last measurement taken on Friday and finished last week at 97.75. The dip is clearly visible in the image below.

Swiss Re Global Cat Bond Performance Price Return Index

Swiss Re Global Cat Bond Performance Price Return Index

Next we look at the Swiss Re Global Cat Bond Performance Total Return index, tracking the total return of the basket of natural catastrophe bonds (which you can quote and chart through Bloomberg here). Again, this index has declined and finished the 11th March at 213.04.

Swiss Re Global Cat Bond Performance Total Return Index

Swiss Re Global Cat Bond Performance Total Return Index

It’s likely that the declines seen in these indices is the reaction to the Japanese events and the knowledge that certain cat bonds are at risk of losses. We can’t see another reason for the declines as the market has seemed healthy and deals have been coming to market as normal to this point.

It will take a while for the final impact to the catastrophe bond market to be fully understood. Some sources say issuance could slow while others have commented that if bonds see losses in Japan it could reinforce the usefulness of cat bonds and encourage new entrants to the market. We will have to wait and see.

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