So the post-Sandy recovery of secondary market prices of outstanding catastrophe bonds has begun on cat bonds which aren’t exposed, but the last week saw further declines in both price and total returns. This is likely a reaction to increasing pessimism regarding the industry losses from the storm and also a downgrade of one exposed cat bond. It’s time for another look at the Swiss Re Cat Bond Performance Indices to see how the uncertainty around hurricane Sandy continues to affect them.
There remains significant uncertainty around the final insurance industry loss total from hurricane Sandy and last week expectations were for the losses to creep upwards. Risk modeller RMS released their first estimate suggesting an industry loss in the range of between $20 billion and $25 billion of insured losses. That’s the highest estimate from a risk modeller so far. As insured losses creep upwards the potential for impact on exposed cat bonds increases, as does the potential for more reinsurance programs and instruments such as ILW’s to start attaching. This uncertainty means that certain cat bonds continue to price below par, while some others have seen price increases as they recover some lost value. The downwards pressure is still sufficient to push both of the cat bond indices into the read again.
Identifying the exposed cat bonds is still a little hit and miss at the moment, particularly with indemnity bonds where some look more exposed than even prices would have you believe if you take into account the sponsors market share in the region. We had a go at identifying some of the cat bonds which could become at risk as losses climb northwards here. Interestingly, Reuters chose to identify just two bonds at risk in an article on Friday, a Successor tranche which we’ve discussed a number of times and also a tranche of Mythen Ltd. The Successor Class V – F4 bonds are certainly some of the most at risk, but the Mythen Class H notes that Reuters mentioned cover hurricanes on a second-event basis, we believe, and are not yet on risk (unless we’ve missed a qualifying event notice). So it seems unlikely that the Mythen Class H notes could face a loss from this event, however Sandy could be the qualifying event needed to put them on a first-event basis for future losses.
Let’s 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 a brief bounce back which we saw last Monday, this index has dropped another 0.7% in the last week making its post-Sandy fall 3.5% and taking it to the lowest point since June. This index closed on the 16th November at 92.66.
Next let’s 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). This index had also seen a small bounce when we looked last Monday but now has dropped 0.53% in the last week. This takes its total decline since Sandy to 2.8% and it closed on the 16th November at 233.19.
So, the continuing slide of these indices will begin to impact November returns for ILS funds. The complexity of an event like Sandy means that the mark-to-market impacts are likely to be felt for longer as the industry loss develops. Investors and fund managers will be hoping for more clarity on affected, or otherwise, cat bonds soon so that uncertainty is removed from the secondary market bid/offer pricing and a more sustained recovery begins.
We’ll keep you updated on the movement of these indices over the coming weeks.