Catastrophe bond indices recover hurricane Irene related mark-to-market losses

It’s time for another of our regular quick looks 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 over the last fortnight. When we last looked both of the indices had dropped due to nervousness caused by a major hurricane approaching the U.S. coastline. However, hurricane Irene caused lower losses than expected and cat bonds remained safe allowing the indices to recover.

When a major hurricane takes aim at the U.S. eastern seaboard the cat bond market always see’s a level of selling as investors try to guess where landfall may be and which bonds may be exposed within their portfolio. The selling of at risk cat bonds often includes a discount and these market-to-market price decreases translate into declines in these indices if the volume sold is sufficient. As hurricane Irene approached the indices reflect the fear of loss among investors and after she passed the indices recover showing investors taking back exposed positions at higher prices.

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). This index recovered very strongly to the end of August then leveled off, which we believe could be due to some selling of the Mariah Re tornado exposed cat bonds after the news that covered losses have increased further, before recovering further in the last week. It closed on Friday 9th September at a level of 94.02.

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 reflects the same trends as the price returns and is now heading back towards the highs seen in early March before the Tohoku earthquake in Japan. The index closed at 213.43 on the 9th September.

Swiss Re Global Cat Bond Performance Total Return Index

We will update you again in another fortnight. It’s expected that the upward trend will continue unless a major hurricane threatens the U.S. coastline or the Mariah Re cat bonds are both announced as triggered.