Cat bond market recovery from Sandy mark-to-market losses continues

by Artemis on December 19, 2012

The prices of outstanding catastrophe bonds in the secondary market continued to recoup mark-t0-market losses caused by hurricane Sandy last week, with both the price-return and total-return cat bond indices regaining ground. Demonstrating the resiliance of the cat bond market to major events, there are still a few bonds priced below par, but even those that were considered most at risk have clawed back some ground this week.

The further out from hurricane Sandy we get the more certain the cat bond and insurance-linked security investment community become that there will be no major losses to the majority of bonds which have northeast U.S. hurricane exposure. As we said in our article last week here, as much as 56.4% of outstanding cat bond capacity has exposure to northeast U.S. wind. The fact that the market is recovering so quickly is positive and shows investors have been rapidly able to understand the potential exposure of a catastrophe event as complex as Sandy.

Of course this is also testament to the increasingly transparent nature of the insurance and reinsurance markets, assisted by highly technical risk models and media publicity, which means that losses are understood much more quickly than they were in the past. This trend towards transparency is something we see picking up pace as more third-party capital comes into the re/insurance sector which demands to be kept informed of loss development perhaps more vociferously than equity investors have done in the past.

So, 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 has risen another 0.24% in the last week, closing at 94.33 on the 14th December. This index has now recovered 1.8% of the mark-to-market impact dip that Sandy caused.

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 has recovered another 0.40% in the last week, closing at 238.97 on the 14th December. Since its lowest point post-Sandy this index has now recovered almost 2.48% of the mark-to-market decline.

Swiss Re Global Cat Bond Performance Total Return Index

Swiss Re Global Cat Bond Performance Total Return Index

This pattern of a slow and steady rise in both the price-returns and total-returns of outstanding cat bonds should continue through the end of the year and into 2013. Two factors could then influence these measures of the cat bond markets success, any losses that occur due to hurricane Sandy particularly after PCS announces their next industry loss estimate in January and any reaction to capital or capacity crunches if issuance turns brisk in Q1. We’ll continue to keep you updated as we move towards the new year.

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