For the first time in a number of months both of the Swiss Re Cat Bond Performance Indices have declined in the last week. It’s rare for both the price return index and total return index to drop in a single week, in fact the last time we saw that was at the end of March when the market was in the midst of a steady decline in price returns. This decline is quite unexpected given the recent buoyant state of the cat bond and ILS market and can only be attributed to hurricane Sandy.
For both of the indices to decline at the same time so suddenly it has be attributable to an event developing or occurring. Contacts tell us that there was no real traded movement in prices in the secondary market as Sandy approached the U.S. at the end of last week. In fact we’re being told that currently prices haven’t moved with any trades today either as the market is expecting more of a flooding event than a wind event, so cat bonds may not be exposed. Despite no positions trading and changing hands we are told that a number of low bids were placed on Friday, but these weren’t matched by offers. This has had an effect of depressing these indices somewhat.
One of our contacts said that this is akin to being in a livecat situation, which of course we currently are with hurricane Sandy. So speculators will place low bids in the hopes of picking up some positions in the potentially exposed U.S. east coast hurricane cat bonds. The way the Swiss Re indices are calculated would take into account some of these low offers which weren’t matched with a bid and given the low volume of secondary market trading in the last week or so the index now effectively reflects the nervousness in the marketplace, like a livecat situation applying mark-to-market pressures. We’re told that it is likely that the drop in the indices will be recovered once the market understands whether hurricane Sandy has any impact on any cat bonds.
Separately we’ve also seen a leap in primary issuance which often has the effect of reducing interest in secondary market cat bond positions. In the last few weeks we’ve seen MultiCat Mexico Ltd. (Series 2012-1) first and then three more deals all pricing last week with Mythen Re Ltd. (Series 2012-2), Atlas Reinsurance VII Limited and Queen Street VII Re Ltd. Between these four transactions in recent weeks over $800m of new cat bond notes have been sold or ordered by investors. That’s enough to take investors minds off the secondary market as they focus on acquiring a piece of these new deals so that will have contributed to the secondary market being a little slower than it was in September.
So, first lets 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). When we last looked two weeks ago the index had continued to climb, signifying continuing attractive returns for investors in the market. On the 12th October the index had risen to 95.83. Now, at its last close on Friday 26th October the index sat at 95.69, a slight decline on a fortnight ago and a drop of 0.35% in the last week.
Now let’s turn to 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 sat at 239.15 on the 12th October. At its close on the 26th October it had declined to 239.57 in the last week. So it is still up on two weeks ago but saw a 0.20% drop in the last week thanks to Sandy.
So at the moment the drop in these indices signifies a blip in the market which won’t actually become reality unless offers come in to match the low bids on exposed cat bond positions. This means impact to investors right now is negligible although that could change with any impact to cat bonds or worsening of the forecast as Sandy approaches. It’s expected that both of these indices will bounce back strongly if hurricane Sandy has no effect on any cat bond positions. Should Sandy have any impact then we’d expect a further drop when these indices next price. We’ll keep you updated.