Post-Sandy secondary cat bond price recovery slows down

The post-Sandy rebound in secondary catastrophe bond prices slowed in the last week. After a healthy bounce of over 1.3% when we looked last Monday, this week the Swiss Re cat bond indices have only seen very slight upward movement. This is perhaps a sign of continuing uncertainty over the eventual insurance industry loss that Sandy has caused. Opinions are still divergent over the actual amount of insured losses but as yet there is no confirmation of any real losses to cat bond investors.

As we wrote last week, ILS investment funds didn’t fare as badly (on average) as you may have thought in October, with the average ILS fund down by just -0.29% for the month of October. The impact of hurricane Sandy on cat bond prices is more pronounced when you look at the Swiss Re indices than looking at ILS fund returns as funds also invest in other reinsurance-linked assets and also account for the mark-to-market losses in slightly different ways. Hence it is likely that ILS funds will (on average) have had a slower than normal November with some booking mark-to-market losses during the month.

In the last week we heard that risk modeller AIR had increased their insured loss estimate by over 70%, then Swiss Re estimated their Sandy loss at around $900m, Credit Suisse said that at a loss over $20 billion some cat bond positions are at risk, insurer Allstate released a loss estimate that points to the industry loss remaining below $20 billion, the economic loss total from Sandy heads for $70 billion and Credit Suisse implemented side-pockets on ILS investments at risk from Sandy. As you can see from that little lot, the market continues to be filled with uncertainty over exactly where the industry loss will end up.

This uncertainty continues to affect secondary prices of outstanding catastrophe bonds, with the clearly negative sentiment on some exposed transactions still showing that they aren’t yet deemed safe by investors. Mark-to-market price recovery slowed in the last week, although there could be a little month-end factored into the indices as well at this latest measurement. Both indices moved upwards but the movement has been markedly slower.

First lets 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). Last week this index had climbed strongly as secondary cat bond prices bounced back from their Sandy mark-to-market losses and had risen by 1.33% to 93.89. Now, at its most recent close on the 30th November the index had risen only very slightly by just 0.07% to close at 93.96.

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). When we looked a week ago this index had risen by almost 1.5% and closed at 236.67 as it recovered from the Sandy mark-to-market impact. Now, at its latest close on the 30th November this index had only managed a 0.25% rise to finish at 237.25.

Swiss Re Global Cat Bond Performance Total Return Index

We expect the indices to continue moving upwards, although perhaps only slowly, as long as there is no news of any cat bonds being impacted by Sandy. Right now the prices of exposed industry loss triggered cat bonds are likely to remain relatively static as we won’t get an update on the PCS industry loss figure until January. Indemnity cat bonds remain the big uncertainty and those are the ones which have seen pricing remain the most depressed and below par.

We’ll update you again next week.