Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Cat bond indices start 2013 still recovering from Sandy


2013 began slowly for secondary market outstanding catastrophe bond prices. Looking at the Swiss Re Cat Bond Performance Indices, to see what they can tell us about the market, it’s clear that the market enjoyed its holiday as gains have been slight. The recovery of both the price and total-return cat bond indices had slowed through December, then over the festive season and New Year gains have been even more sluggish, a sure sign that the market took advantage of time off.

The cat bond indices have both been in recovery mode ever since hurricane, or superstorm, Sandy struck in October. Both the price return and total return indices took a dive after Sandy, as investors and traders attempted to understand the extent of the damage from the storm and the potential for any exposed catastrophe bond losses.

As it became clear that very few cat bonds were at risk of a loss from Sandy the indices both began to recover the mark-to-market losses that Sandy caused. These gains slowed in December (our last update here), typically a quieter month on the secondary market anyway, and then slowed even more as we entered the holiday period when trading is light to zero and any trades would normally be for portfolio adjustment needs of the January renewals.

Despite continuing to move upwards at this very slow rate the recovery from Sandy mark-to-market losses is ongoing. The price return index remains below the level it reached just prior to Sandy’s formation, while the total return index has just managed to pass the pre-Sandy high in the last two weeks.

First let’s turn to 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 closed at 94.70 on the 4th January. The price return index has now recovered 2.2% of the mark-to-market impact from hurricane Sandy but still needs to rise another 1.4% to reach the pre-Sandy high again.

Swiss Re Global Cat Bond Performance Price Return Index

Swiss Re Global Cat Bond Performance Price Return Index

Secondly we 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). This index closed at 241.13 on the 4th January meaning that it has now fully recovered from Sandy’s mark-to-market having now risen 3.4% since its lowest point post-Sandy.

Swiss Re Global Cat Bond Performance Total Return Index

Swiss Re Global Cat Bond Performance Total Return Index

It’s going to be interesting to watch these indices over the coming few months as some are forecasting an active primary cat bond issuance market through the first quarter of the year and last year that caused secondary marks to dip as the focus for investors was on accommodating new deals. We expect the price return index will continue to recover over the next week or two but beyond that the volume of new cat bonds coming to market could slow things down. We’ll keep you updated regularly on the progress these indices are making.

The total-return of the catastrophe bond market as measured by these indices was over 10% in 2012.

Don’t forget to answer our anonymous poll to tell us what volume of catastrophe bonds you think will be issued in 2013?

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