The catastrophe bond and insurance-linked securities market is coming to terms with the Japanese earthquake and tsunami disaster which struck the northeast of the country a month ago. The market reaction, reflected in recent changes in cat bond pricing, was to be expected when an event is assumed to have caused losses. Now, one month later, the amount of losses expected by the market and the number of cat bonds likely to default are better understood and as a result pricing is becoming more stable.
This trend can be clearly seen in the Swiss Re Cat Bond Performance Indices, which we follow and update our readers on regularly. Both indices dipped dramatically in the weeks after the Japanese disaster but have now begun to stabilise and one of the indices has even ticked upwards slightly in the past seven days. As with any financial index, they initially reflected the nervousness around losses and a flight to safety for some investors seeking to offload their positions. That turned to opportunism for some as they found it a good time to buy into the market at cheaper prices and now, a month after the initial event, trading and pricing is gradually returning to a more normal pattern.
So, as usual we first 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). This index has continued to decline but only by a small amount in the past week, dropping from its close of 94.01 on the 1st April to close at 93.89 on the 8th April. This index is now 4.45% lower than it was before the Japanese quake and the decline has slowed significantly.
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 has actually risen in the last seven days closing at 205.90 on the 8th April (up from its previous close of 205.86 on the 1st April). This index is still around 3.7% down since the earthquake in Japan.
It’s encouraging to see these indices behave as we would expect when we compare it to the reaction and sentiment in the market. They demonstrate a mature, sophisticated market which reacts to disaster in ways we would expect. Information on which catastrophe bond deals have been affected (either total loss as in the case of Muteki, or potential activation) by the disaster in Japan should be known soon and then we should see the market react to that in these indices too. It will be interesting to see how the next issuance of a cat bond is received by investors.