Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Both catastrophe bond indices rise for first time since Japan earthquake


For the first time since the Japanese earthquake on the 11th March, which sent the Swiss Re Cat Bond Performance Indices into a dive, both indices have gained at the latest close on Friday. It’s two week since we last reported on the state of the Swiss Re cat bond indices and it’s beginning to look like the indices have started to stabilise as the market comes to terms with the fallout of losses to impacted cat bonds from the Japan quake, the RMS model update and U.S. tornadoes which are impacting exposed cat bonds aggregate loss totals.

The impact to the catastrophe bond market from Japan took another turn which we reported on Friday as SCOR’s Atlas VI Capital Ltd. Series 2009-1 deal was announced by Standard & Poor’s to be at greater risk as two large aftershocks in Japan have both qualified as events under the terms of the deal and will add to annual aggregate losses under the transaction. While not a default, this does mean that the deal requires less events over the rest of the year to become a loss. The cat bond indices price on a Friday so it is possible that the market hadn’t become fully aware of this latest impact from Japan, so we could see this news price into the indices over the next week.

Other news which has the potential to affect the market and as a result the value of the cat bond indices in the past two weeks includes the continued discussion of the RMS U.S. hurricane model update and the news that it could increase cat bond expected losses by up to 90%, the continuing spate of tornadoes which are likely to continue increasing the annual aggregate losses for certain exposed cat bonds and of course the impending U.S. hurricane season which always causes these indices to drop at this time of year.

So for both of the Swiss Re cat bond indices to have risen in the last week is good news as it shows how much this market has matured and become capable of digesting the bad news, rationalising the potential outcomes and concluded that none of the events that have occurred are severe enough to have an ongoing negative impact to the market. That assessment ties in with many of the contacts we have spoken to in the last week all of whom remain positive and see cat bonds bouncing back strongly in the future.

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 showed a very small rise in the last week and closed on Friday at a level of 93.38. This is the first weekly increase since the 11th March.

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 the basket of natural catastrophe bonds (which you can quote and chart through Bloomberg here). This index has now risen for two consecutive weeks and closed on Friday at 206.72.

Swiss Re Global Cat Bond Performance Total Return Index

Swiss Re Global Cat Bond Performance Total Return Index

Whether the recovery will continue is hard to tell at this time of year but the fact that both indices have stabilised suggests that once hurricane season has begun we are likely to see a stronger recovery in the indices as the seasonal bounce kicks in.

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