Swiss Re Insurance-Linked Fund Management

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More gainers than losers on cat bond pricing sheets last week

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Another positive signal that the catastrophe bond market may already have fully marked in loss expectations from hurricane Ian, is the fact that on secondary market cat bond pricing sheets, there were many more outstanding bonds that gained in price, than lost any further ground last Friday.

catastrophe-bond-secondary-trading-tradeThe catastrophe bond market secondary marks made by brokers and reinsurance firms capital market teams are key signals for the health of the cat bond market.

Since hurricane Ian made landfall in Florida in September , we’ve been documenting the significant loss expectations of the cat bond market, such as with the significant decline seen in the Swiss Re cat bond index after the storm, as well as the reaction of catastrophe bond funds.

Secondary positions, or outstanding cat bond names, are marked weekly, to the best of the capital market teams ability, to reflect seasonal changes to risk premia, spread related effects from market forces, as well as loss expectations and recoveries.

In the last week, across a number of cat bond pricing sheets analysed by Artemis, the number of cat bond names that gained in value far outnumbered those that lost additional value.

Of the gainers, these were a broad cross-section of the market, but importantly the gainers included some cat bond names that have specific exposure, or potential exposure, to losses from hurricane Ian.

That could be another signal that the cat bond market has effectively priced in loss expectations for the majority of hurricane Ian-exposed cat bonds already, which could be seen as encouraging if there is some recovery to come, as losses get realised and some bonds are found to be unaffected by the storm.

As we explained in an article from last week, the eventual realised cat bond market losses from hurricane Ian may end up being as little as half of the mark-to-market-wide decline initially seen in the outstanding cat bond market.

As we also reported, a stabilisation seen in the Swiss Re cat bond indices and a slight rise week-on-week could also support a thesis that the cat bond market had effectively priced in the loss potential of hurricane Ian at the top-end of expectations, as Lane Financial also recently suggested.

Positions on pricing sheets moving, generally, more up than down, may be another supportive factor here.

Of the losers, so catastrophe bond names that saw their pricing decline in the last week, again some of the diversifying cat bonds lost some value, all transactions with no exposure to hurricane Ian.

As we’ve said in previous articles, this also implies spread widening, an element of which is perhaps related to the cat bond market baking-in future issuance yield expectations as well.

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