Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Cat bond indices show no change after multiple rating actions


Three catastrophe bond transactions received a rating action in the last week as the disastrous first half of the year continues to reveal the impact it has had on outstanding cat bonds and the cat bond market. Two Japan earthquake exposed transactions were both downgraded, closely followed by a U.S. tornado exposed cat bond being placed on CreditWatch negative. Despite these ratings actions, the Swiss Re Cat Bond Performance Indices have remained stable in the last fortnight.

The first cat bond to have its rating changed was the Vita Capital IV mortality bond which was downgraded by Standard & Poor’s on a perceived heightened exposure to fatalities which can be caused by tsunamis (an unmodelled risk under the deal). This rating action makes sense to the market as tsunami is a potentially huge exposure which wasn’t modelled for the potential loss it could cause. After the 11th March disaster in Japan it is now clear that this transaction is exposed to the fatalities a major tsunami could cause.

The next cat bond to be downgraded was Montana Re Ltd. which S&P confirmed was activated by the Japanese earthquake and is now on risk for any qualifying subsequent events. This deal was widely understood as activated already by the market so a downgrade for Montana Re was no surprise.

The last transaction to have a ratings change last week was the U.S. tornado exposed Mariah Re catastrophe bond. This deal has been clocking up qualifying events against its annual aggregate limit. It still has some way to go before it could be triggered but given the severity of the severe thunderstorms and tornadoes this year S&P have placed it on CreditWatch negative as they wait for any further losses to be reported. The final loss estimate for the Joplin tornado is still outstanding and that is likely to impact the aggregate loss amount for Mariah Re as well. Again, this rating action was no surprise, however this cat bond, out of the three, is probably the most at risk of actually generating a loss to investors principal.

So since we last looked at the Swiss Re Cat Bond Performance Indices the market has received further bad news about exposure to the catastrophic events we’ve seen in the first half of the year. Despite this the indices have remained stable and have both gained slightly.

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 rose in the week running up to the 10th June and remained almost level last week, closing at 93.59 on the 17th June. It remains well down since it peaked in March and plummeted after the events in Japan but it is encouraging to see it remain so stable at the start of the U.S. hurricane season. Typical behaviour at this time of year would be for this index to be declining.

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 has continued to recover steadily in the last fortnight, closing at 208.48 on the 17th June.

Swiss Re Global Cat Bond Performance Total Return Index

Swiss Re Global Cat Bond Performance Total Return Index

So, the cat bond market still seems to be behaving as we’d expect and we’re certainly noticing a level of maturity as these indices remain stable despite what could be interpreted as bad news. What is needed now is new issuance to replace some of the maturing cat bonds. With no sign of any deals in the pipeline right now, after Loma Re completed last week, it looks like new issuance will be scarce through the U.S. hurricane season.

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