The slow recovery of many secondary market catastrophe bond prices continues in the wake of hurricane Sandy. Most of the impacted bonds which are now understood to be safe have recovered the mark-to-market losses they had seen, a number of others remain priced below par as their fate is still uncertain. Other cat bonds continue to follow seasonal trends and this, along with price recovery, has helped the cat bond indices maintain upwards trajectory in the last week.
The rate of growth of the two cat bond indices we focus on has not been atypical for the time of year over the last couple of weeks, it just seems a little slow given the rate the indices have grown by over the course of 2012. When we looked at these indices last week both had risen a little as the mark-to-market losses from Sandy continued to be recovered and that trend has continued over the last seven days.
So, first let’s 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). When we last looked this index had risen by just 0.07% in the prior week. At its latest close on the 7th December the index had risen a little faster by 0.15% to close at 94.10. Since the bottom of the Sandy dip cat bond price returns have recovered 1.55% of the mark-to-market impact.
Now let’s look at 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 last week this index had risen by 0.25% in the previous seven days. No, at its latest close on the 7th December the total-return index had risen at a faster rate by 0.32% to close at 238.01. Since this index hit the lowest point post-Sandy it has now recovered 2.07%.
We expect this recovery to continue over the coming weeks and new cat bond issuance will likely contribute to this. Some cat bonds, which are the ones thought most exposed to Sandy, continue to be priced below par. Examples trading the furthest below par of these include Swiss Re’s Successor Class V – F4 bonds and the Class B notes of Chubb’s East Lane Re IV Ltd. cat bond. These are the two cat bonds with the most markedly depressed pricing according to our sources. The Successor V-F4 notes are priced at an average bid of around the 72 to 73 mark at the moment, while the East Lane Re IV-B notes are priced at an average bid in the region of 86. Both well below par and neither has seen any real recovery since Sandy. There are other cat bonds still priced in the 90’s after Sandy which have some risk if industry loss estimates rose or UNL estimates increased from their sponsors.
With no major update to any industry loss numbers expected until January when PCS updates their estimate it could be some time until cat bond prices bounce back completely. We expect the indices will continue a slow and steady rise in the coming weeks and we’ll keep you updated.