Normally we refer once a month to the Swiss Re Cat Bond Performance Indices and that is enough as their movement is rarely sudden. The events in Japan however were highly unusual and after exceptional events such as the tragic earthquake and tsunami disaster the catastrophe bond indices are a good sign of how the market initially reacted to the catastrophe.
We updated you only last week to show how the Swiss Re indices had fallen after the events. However the index values were recorded on the day of the earthquake so pricing had not really been fully adjusted to reflect the reaction to the event of investors and traders. The indices, which are updated weekly on a Friday, declined much more dramatically this week as people have now absorbed the enormity of the disaster.
As usual, 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). You can see the dramatic drop in price returns, a lot of which reflects a slow down in trading and a nervousness among certain exposed traders who attempted to offload their investments (a futile effort in many cases). In the past week to its close on Friday 18th March the index fell from 97.75 to close at 96.18 on the 18th. It’s one of the biggest drops this index has ever experienced.
Now 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 fell from its close on the 11th March at 213.04 to finish on the 18th at 209.96, again one of the biggest falls ever experienced by the index.
So you can clearly see the nervousness in the market. Reports suggest that much of the secondary market trading in catastrophe bonds has slowed as investors and traders await the outcome for the cat bond transactions which are exposed to the events in Japan. The Wall Street Journal reported Friday that cat bonds which were trading around par had slid to 80 cents on the dollar, a 20% drop, according to Paul Schultz of Aon Benfield Securities. The Topiary Capital cat bond issued on behalf of Platinum Holdings has become the first to be put on watch for ratings changes, we believe there’s a good chance some more will follow this week.
It’s possible that these indices could slide further next Friday depending on whether the outcome of exposed cat bonds is known. The market is likely to be in limbo until the outcome and any losses are fully understood.
As the ramifications of the Japanese earthquake and tsunami become clearer for the cat bond market we will continue to keep you updated.