A fortnight ago when we last looked at the Swiss Re Cat Bond Performance Indices, to see how their performance reflected the mood and state of the catastrophe bond and insurance-linked securities market, we were surprised to see that both indices had remained stable despite a number of ratings actions on cat bonds. There’s been another rating action since on a U.S. thunderstorm exposed cat bond and one of the indices has now slipped slightly.
The U.S. tornado exposed Mariah Re Ltd. has now had its ratings cut by Standard & Poor’s as qualifying aggregate losses mount putting the deal more at risk of potential default. There’s still some way to go before investors in this cat bond actually lose any principal but the downgrade is enough to make them nervous and cause some activity in the secondary market which can lead to mark-to-market losses in its price.
Other news in the last fortnight which could have impacted cat bond price returns was the announcement by S&P that their judgement on the cat bonds which use the RMS U.S. hurricane model will be due soon. The activity of running these deals through the new and updated risk model will soon be finished and S&P will have a picture of the new risk profile and any changes to the expected loss under the new hurricane model. It’s expected that at least some of the exposed cat bonds will be downgraded and while that doesn’t actually imply any real greater risk of default (the chances of a hurricane hitting land haven’t grown) it is enough to make investors nervous, particularly at this time of year when the hurricane season has now begun.
First we 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). After rising quite steeply when the index priced just over a week ago, the last week has seen a slide. The ratings news of the last four weeks seems to have been sufficient to have caused a slip in this index , some of which is likely attributable to the Mariah Re downgrade and mark-to-market losses that bond will have suffered. There is also price pressure due to the developing U.S. hurricane season which always has the potential to impact the indices at this time of year. This index closed down at 93.82 on the 1st July.
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 as well saw a good gain in the first week but then slowed to remain almost static over the last seven days. It now sits at 209.66 at close on the 1st July.
We suspect that we’re going to be in for a trend of slow gains and small declines in these indices over the summer, with declines particularly possible when we see a hurricane in the Atlantic or Gulf of Mexico and once we hear the final result of the review of cat bonds which use the RMS hurricane model. It is possible that we could see some issuance over the course of the next few months as it would be an ideal time for an issuer to market a non-U.S. hurricane risk cat bond as demand for diversification opportunities remains particularly high.