Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Catastrophe bond investment returns in 2008 beat stocks and commodities


Despite 2008 being a year of economic upheaval with the credit crunch biting and fluctuations in prices of almost every asset or commodity you can think of, catastrophe bonds have really not fared too badly. If you look at stock markets and commodities, most are down on the start of the year.

Let’s take a look at the movement in some of the worlds leading stock markets in 2008.

First the UK’s FTSE 100 index of leading shares:

FTSE 100

Next, the Dow Jones:

Dow Jones

To show it’s a global phenomenon, here’s the Japanese Nikkei 225:

Nikkei 225

Now, let’s compare those drops with some commodities.

First the price of Brent crude oil:

Brent crude oil price

Next the forex gold index:

Forex gold index

Finally, the Dow Jones AIG Commodity Index:

Dow Jones AIG Commodity Index

Can you see the trend? All the above indices and commodities are down on the start of the year (except maybe gold which has seen a rally since currencies have dropped so much). None of them look like they’ve been good long term investments over 2008.

Here’s another example of this trend, the UK pound against the U.S. dollar:

UK Pound against the US Dollar

With this downward trend you’d expect most assets to have declined somewhat over the last twelve months, but one investment that is still up on the start of 2008 is catastrophe bonds.

The Swiss Re Cat Bond Total Return Index shows that it is still a few points up on the start of the year which is great news for cat bond investors and the market in general. If the cat bond market can get moving again in the new year it should find investors are willing to get involved as long as the due diligence around correlation to debt and risk modelling are thoroughly transparent. Let’s hope 2009 reveals more innovation from issuers, structurers and modellers so confidence returns to the market and deals get to market!

Below is a chart of the Swiss Re Cat Bond Total Return Index over the last 12 months (click it for a larger version):

swiss re cat bond index

Share, commodity and currency graphs via the BBC website. You can chart the Swiss Re Cat Bond Total Return Index on the Bloomberg website.

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