Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Both catastrophe bond indices decline in last fortnight


Another fortnight has passed since we last looked at the Swiss Re Cat Bond Performance Indices to assess how they have performed and reflect the mood and sentiment within the insurance-linked securities market. Last time we looked it seemed that the indices were recovering from the news that the Mariah Re catastrophe bonds were facing further losses and we suspected that all of those losses may have been priced into the market.

However the indices have both dropped in the last week and the price return index has dropped in two consecutive weeks. We can only assume that this is due to the announcement from S&P that the Mariah Re 2010-2 cat bond is likely a total loss and the Mariah Re 2010-1 is accumulating further losses. The realisation among investors that the losses to the 2010-1 tranche of notes could continue to rise has caused some further selling of positions in Mariah Re and mark-to-market losses. It is possible that some concern over the direction of tropical storm Rina a fortnight ago may have impacted the price return index during that week as some early forecasts took the storm to Florida as a hurricane.

There has actually been some consternation among less experienced investors who had not expected it to take so long for losses for Mariah Re to develop. We discussed this issue with a number of investors last week and there was a general feeling of surprise among some of them that the loss estimates continue to rise, with some asking when this would end. Something for sponsors and structurers to bear in mind for future deals.

There was one other shock to investors which could have contributed to the decline in these indices over the last two weeks and that was the earthquake in Turkey which struck on the 23rd October. There was one exposed catastrophe bond, Ianus Capital, but once the loss estimates came in it seems safe to assume that it won’t have been triggered. However there was some nervousness surrounding the unknown impact at first and this could have contributed to these index declines.

Also in the last fortnight, the Queen Street IV Capital cat bond completed successfully for Munich Re and the Compass Re Ltd. cat bond began marketing for a subsidiary of Chartis. We understand that another cat bond will be officially marketing later this week for regular sponsor USAA and there is a good chance of at least one more cat bond coming to market before the end of the year.

So, first we 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). This index has tracked downwards for both of the last two weeks. It could see further downward pressure as losses to Mariah Re develop for the upper layer of cover but we don’t expect to hear an update on those losses for a few weeks. This index closed on the 4th November at 94.61.

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). This index dropped slightly in the last week for the first time since August. It’s likely that this is a knock on effect of the default of the Mariah Re 2010-2 tranche but there is also a chance it could just be an end of month blip, it’s very hard to be certain. We expect the total return index to return to upwards growth again the next time we look. This index closed at 217.48 on the 4th November.

Swiss Re Global Cat Bond Performance Total Return Index

Swiss Re Global Cat Bond Performance Total Return Index

So the shakeout of the Mariah Re cat bonds continues to affect these indices, but the supply of fresh cat bonds should help total-returns to keep rising. We’ll update you again on these indices in another two weeks.

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