Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Catastrophe bonds among top performing assets since Lehman bankruptcy


Five years on from one of the largest financial firm failures ever, the bankruptcy and collapse of investment bank Lehman Brothers, many global financial assets have struggled to provide attractive returns as the world’s economies struggled to recover, with some being hit by multiple recessions.

The last five years, since the high-profile investment bank failed signalling a new peak in the global recession and the potential for financial contagion, have seen economies beginning to recover (to some degree) and asset class performance growth returning to many markets.

The collapse of Lehman Brothers had particular significance for the catastrophe bond market. A subsidiary of the investment bank, Lehman Brothers Special Financing, acted as total-return swap counterparty for a number of transactions which subsequently defaulted due to their inability to maintain interest payments and return full principal after Lehman failed.

The cat bond market very quickly adapted to prevent such an issue repeating itself and the use of total-return swap counterparties in cat bond transactions ceased very soon after the collapse of Lehman. In fact the last cat bonds featuring total-return swaps as collateral arrangements have now matured and the cat bond market no longer faces this risk.

So Lehman, and the fallout the catastrophe bond market faced from its bankruptcy, is a great example of the cat bond market reacting to a potential risk by adjusting transaction details and structures to ensure investors principal is held more securely.

An interesting fact in the post-Lehman world is that catastrophe bonds are among the best performing assets since the investment bank collapsed. In fact based on data from the Zerohedge website, cat bond asset class performance as measured by the Swiss Re Global Cat Bond Index total return, is the fifth best performing of a group of global financial assets over the last five years.

The article on Zerohedge, which you can read here, shows a number of the most widely accepted global financial assets and their total return over the five years post-Lehman bankruptcy. We included the red bar for catastrophe bonds, using data from the Swiss Re cat bond index, which shows catastrophe bonds as an asset class as the fifth best performing of this group since September 2008.

That’s an extremely impressive record, especially considering the Lehman impact on cat bonds, the Tohoku earthquake impact and the Mariah Re cat bond defaults all occurred within this time-frame. This drives home the attraction that capital market investors have found for catastrophe bonds in recent years. Sophisticated institutional investors will be performing similar comparisons of cat bonds, or indeed more broadly reinsurance, as an asset class against potential peers and when the results are so compelling the attraction to investors becomes obvious.

By our calculation, catastrophe bonds as measured by the Swiss Re Global Cat Bond indices have seen a total return of more than 52% over that five-year period. A very healthy return which has outstripped many of the world’s most popular financial assets.

The charts below show copies of the original Zerohedge graphics with catastrophe bonds inserted at number five in the rankings. This data is a great advert for cat bonds as an alternative, diversifying and low-correlated asset class performing better than many more mainstream investment assets.

Catastrophe bond total return versus other major global financial assets

Catastrophe bond total return versus other major global financial assets since Lehman's bankruptcy five years ago (click the image for a larger version)

Perhaps easier to read, the version of the graph below is flipped round to make it easier to compare the different asset classes performance since the bankruptcy of Lehman Brothers.

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Catastrophe bond total return versus other major global financial assets

Catastrophe bond total return versus other major global financial assets

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