The Swiss Re Cat Bond Performance Indices have continued to fall as the market reacts as it comes to terms with the 11th March earthquake and tsunami disaster. Investors are waiting to see how many of the catastrophe bond deals which are exposed to earthquakes in Japan will be triggered and experience a loss. These exceptional events were bound to impact these indices but we are beginning to wonder how much further they can fall.
Both of the indices have seen a significant drop again in the past week. The drop clearly shows that the market is pricing for a loss and it’s evident that there are a lot of nerves amongst the investment community. However, as you’ll have seen if you’ve been reading our coverage since the events in Japan, it’s likely that any loss in catastrophe bonds will be small by comparison to the market. Industry sources have said that at most they expect around 10% of the value of the potentially exposed cat bonds to trigger. That would make a loss of somewhere around $150m to $200m, which while a significant amount of money is not huge loss for the market to bear.
Catastrophe bond investors are sophisticated and it’s unlikely any one investor would be caught for a large amount of losses. Investors hedge their risks across perils and geographies of cat bonds so it’s unlikely that any single investor will be hit really hard. There have been news articles in the press which have picked on certain hedge funds, saying that they will suffer from these events. In reality all funds with an investment in catastrophe bonds are likely to trend downwards while the market is reacting and this is expected at a time like this.
Now onto the indices. First we look at the Swiss Re Global Cat Bond Performance Price Return index first, tracking the price return for all outstanding USD denominated cat bonds (which you can quote and chart through Bloomberg here). The index has dropped from its close of 96.18 on the 18th March to close at 94.69 on the 25th March. That’s a further 1.5% fall. Since the Japan earthquake this index has dropped over 3.6%. There’s still a degree of selling going on as investors adjust their portfolios, we’ve also heard of new investors taking the opportunity to buy into the market at cheaper prices. This index is now approaching catastrophe bond price returns last seen during the U.S. hurricane season in July.
Now we turn to 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). Again the downward trend continues with catastrophe bond total returns. This index has dropped from its close of 209.96 on the 18th March to close at 207.01 on the 25th March. That’s a fall of 1.4% in the past week. Since the disaster this index has dropped around 3.2%.
We think it’s likely that the downward trend could continue for a while longer as the market awaits the final outcome for exposed cat bond deals. That could be another month away so the uncertain sentiment is likely to continue. Of course that does mean that pricing will likely be depressed for a while. It’s possible that anyone who has been planning a new issuance could take advantage of the market conditions and bring a deal to market much more cheaply than a few weeks ago.
We’ll continue to update you on these indices as the market comes to terms with the events in Japan. It’s likely we could see further drops over coming weeks however once the final outcome and losses from the earthquake are known the index will likely regain some ground.