As expected the post-Sandy recovery in the outstanding catastrophe bond markets price and total returns has now helped the Swiss Re cat bond indices to a healthy weekly increase of well over 1%. Prices of many U.S. hurricane cat bonds have increased in the last week, with just the few that are more exposed to the damage caused by hurricane Sandy still priced well below par. It’s time for another look at the Swiss Re Cat Bond Performance Indices to see what they can tell us about the market.
When we looked last week both of the cat bond indices had declined again, despite the fact that some cat bonds had been recovering some of the mark-to-market losses that they had suffered. This was likely a reaction to continued pessimism about the industry loss total that Sandy would cause. As the number of cat bonds considered at risk from hurricane Sandy reduces, as loss estimates are released by sponsors and the industry loss begins to get clearer, these indices will recover from their mark-to-market declines.
Last week, Property Claims Services (PCS) released their initial industry loss estimate for Sandy. They put this first estimate at $11 billion, which is well below the estimates from some risk modellers. This will have removed some of the nervousness in the cat bond market, although it should be noted that this estimate is currently expected to increase significantly according to many industry observers and participants. Today reinsurer Swiss Re has released its first loss estimate and put the industry loss toll at somewhere between $20 billion and $25 billion. So a lot of uncertainty still exists over where the final loss bill will end up.
So a good number of the cat bonds which were impacted by Sandy’s approach and landfall have now begun to recover the mark-to-market price declines. Uncertainty still exists over the final loss toll and also the loss burden that some cat bond sponsors may end up taking on, so there are still a number of cat bonds priced well below par due to nervousness over potential Sandy losses. It’s expected that the cat bonds which have begun to recover will continue to over the coming weeks. For ILS funds and investment managers this should help them to recoup the majority of losses that their funds suffered from Sandy. Our article from the 15th November is still representative of most of the cat bonds considered to still have any risk attached from Sandy.
So lets 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). When we looked last week this index had dropped about 0.7% to 92.66, taking the total impact of Sandy on price returns to 3.5%. Now, at its most recent close on the 23rd November the cat bond price return index had bounced back by 1.33% to 93.89.
Next 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). When we looked last week this index had declined 0.53% to 233.19, taking the total impact of Sandy on the total return of the cat bond market to 2.8%. At close on the 23rd November the total return index had recovered almost 1.5% and closed at 236.67.
For investors in catastrophe bond and insurance-linked securities funds the jump in these indices will be welcome and if both indices manage another positive week this week some funds will see very positive returns for November, particularly if they booked Sandy mark-to-market losses in October. We expect the indices to climb again over the next seven days unless any news emerges about Sandy loss creep or potential impacts to any cat bonds.
We’ll update you again next Monday.