Cat bond price returns drop further on news of second Mariah Re default


It’s time for another of our fortnightly looks at the Swiss Re Cat Bond Performance Indices to see how they have performed and what their movement can tell us about the mood and sentiment within the insurance-linked securities market. Last time we looked at the indices it was evident that the full impact of the losses to the Mariah Re 2010-2 severe thunderstorm cat bond were still being priced into the market and as a result price returns had dropped.

Two weeks ago when we last wrote about these indices we hoped that all of the downside from the Mariah Re losses had been priced into the market for the moment and that we’d begin to see a period of recovery in the price returns index and continued growth for the total return index. Then the news emerged that the first Mariah Re 2010-1 cat bond was also now a total loss due to a significant rise in one catastrophe events loss estimate. That news was confirmed later that day by S&P and it was only then that investors knew that the full $200m of principal in both Mariah Re cat bonds was lost.

As the Mariah Re 2010-1 cat bond notes were already facing some loss of principal ($11.6m), and there was an understanding that the loss could grow as estimates were updated, the notes were already well discounted in the secondary market prior to last weeks news so while the price return index has dipped it hasn’t plummeted as might have been expected on news of a total loss.

So 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). This index dropped further over the last two weeks as the Mariah Re losses were priced into the market. With no more bad news left to hit the market (further catastrophe events aside) we should see some recovery begin to take hold. This index closed on the 2nd December at 94.14.

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 made a small gain over the last fortnight and we would expect the upwards trend to increase as the market see’s new deals complete in the coming months. It closed on the 2nd December just off an all time high at 217.77.

Swiss Re Global Cat Bond Performance Total Return Index

Swiss Re Global Cat Bond Performance Total Return Index

So, with both of the Mariah Re cat bonds now a total loss and fully priced down in the market we hope to see a period of steady recovery from both of these indices. There is no further uncertainty left surrounding any outstanding cat bonds, unless you count the confusion surrounding Nelson Re, but that is likely fully priced into the market by now, so we hope that there is no more downside to come. Hurricane season is now over as well and U.S. hurricane exposed cat bonds should be recovering strongly. So, major catastrophic events aside we should see a more calm few weeks for these indices with more of an upward trend returning.

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