Catastrophe bond indices slide further as hurricane season approaches

It’s time for another look at the Swiss Re Cat Bond Performance Indices to see how they have performed over the past two weeks. The market continues to digest the effects of the earthquake in Japan and we are now into the month prior to the start of the Atlantic hurricane season which always has an effect on cat bond pricing and returns as the market prices accordingly.

The market now knows that of the Japanese earthquake exposed catastrophe bonds Muteki Ltd. is a total loss, meaning investors lose their $300m principal, and Topiary Capital Ltd. has been activated and is now exposed to any qualifying events during the rest of the deals term. We’re still waiting to hear whether Montana Re Ltd. has been activated by the earthquake, and some notes issued by Vega Capital Ltd. remain on review, so some uncertainty remains about the situation post Japan earthquake. As we wrote last week, Plenum Investments reported that they have begun to see some recovery of Japan quake exposed cat bonds and they expect the recoveries to accelerate as the full impact becomes clearer.

Another issue potentially affecting the cat bond indices is the new U.S. hurricane model launched by Risk Management Solutions (RMS). The new model has increased the risk profile for many U.S. States and as a result ratings agencies have requested that various cat bond transactions be run through the new model to see if it affects expected loss amounts and the like. This could have led some sponsors to hold off on issuing deals they had been planning to bring to market prior to the hurricane season, we wrote last week that Aon Benfield expect a quieter than normal Q2 cat bond issuance pipeline.

Another issue was raised in the last couple of days which could impact investor sentiment and therefore the cat bond indices and that is the fact that Standard & Poor’s issued a statement regarding two tranches issued by Residential Reinsurance Ltd. and the recent weather events which are adding to the aggregate loss totals. It’s unlikely either would be triggered but recent tornado and severe thunderstorm weather in the U.S. has made the risk profile of these notes slightly higher.

So, a lot has been happening which could affect the cat bond indices, so how have they fared?

First we look at the Swiss Re Global Cat Bond Performance Price Return index first, tracking the price return for all outstanding USD denominated cat bonds (which you can quote and chart through Bloomberg here). This index has declined further in the past two weeks, we suspect the main reason is the seasonal drop which the market expects in the run up to hurricane season though there may be some effects from the other issues we noted above as well. At the latest close on the 6th May this index stood at 93.43.

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 the basket of natural catastrophe bonds (which you can quote and chart through Bloomberg here). This index which had recovered slightly when we looked at it a fortnight ago has now declined further we believe due to the seasonal effects of an impending hurricane season (but again some of the other market issues we noted above may apply). This index stood at 206.18 at close on the 6th May.

Swiss Re Global Cat Bond Performance Total Return Index

So neither of the indices have recovered from the initial declines suffered directly after the earthquake in Japan. With hurricane season looming and the market still digesting other issues we don’t expect any bounce back until after the beginning of the season. Last year the indices began to rise again from July and it’s likely we will see similar this year.