Sandy mark-to-market losses evident on catastrophe bond indices

A week ago we wrote that as hurricane Sandy approached landfall on the U.S. northeast coast both of the Swiss Re Cat Bond Performance Indices declined, the first time we’d seen a dual decline since March. Given that this drop was prior to landfall it was clear that we would see an even larger decline in these indices after landfall once the impact of hurricane Sandy, potential for reinsurance industry losses and potential effect on exposed cat bonds was better understood.

So we wanted to update you again this morning on these indices to show any Sandy impacts from after the event when the market had a clearer picture of the potential damage and losses that might be faced. As expected, both of the indices have declined further over the last seven days. In fact, they’ve both declined a lot further.

Given that these indices show us the price return of the outstanding catastrophe bond market and the total return, they are a good proxy for the impacts that cat bond and ILS funds and investors can expect to see from Sandy’s impact last week. At the moment there is no clear news on any direct losses to any exposed cat bonds, that may take a little more time to become clear, but the mark-to-market impact to many cat bonds covering the region that Sandy struck will have had an effect. Many of the ILS fund managers we’ve spoken with say that they expect October’s performance to be virtually wiped out by these mark-to-market losses, whether any cat bonds face a loss or not. For some, that will be the worst of Sandy’s impact, a dip in returns that will likely be recovered over the coming weeks as mark-to-market impacts are usually clawed back. For some ILS funds who invest in ILWs and private reinsurance contracts there is the chance of greater losses as we understand a number of contracts could be exposed should Sandy’s industry loss come in a lot higher than $10 billion.

So, to begin we 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). On Friday 26th October the index sat at 95.69, having fallen 0.4% that week. Now, at the latest close on Friday 2nd November the index had dropped to 93.17, a much bigger fall of 2.6%. So in total this index has slipped around 3% due to Sandy. This mark-to-market impact will manifest itself across pretty much every ILS funds October returns, leaving the majority with a mark-to-market loss for the month we expect.

Swiss Re Global Cat Bond Performance Price Return Index

Next we 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 has also seen a large decline in the last week. At its close on the 26th October it had declined to 239.57, a drop of 0.2% in that week. Now at its latest close on the 2nd November the index sits at 233.67, a decline of 2.5% in the last week.

Swiss Re Global Cat Bond Performance Total Return Index

We expect that the mark-to-market losses will be recovered but the question remains whether any exposed cat bonds will suffer any loss of principal. At this time it is hard to say, although the latest pricing on some exposed cat bonds shows which ones investors are most nervous about (more on that later today). There is still a strong likelihood that losses from Sandy will erode the aggregate protection on a number of annual aggregate cat bonds, but whether it will be enough to cause a loss is hard to say. Of course any erosion of aggregate protection does make a cat bond effectively more risky for the remainder of the risk period so that could make some mark-to-market price declines stick.

We’ll keep you updated on these indices again in another week to see whether there have been further declines as Sandy’s losses crystallise or whether the indices have bounced back as mark-to-market declines are recouped if no actual impact hits any cat bonds.

Here’s some of our other coverage on Sandy, most recent first:

– Estimate suggests Residential Reinsurance 2010 cat bond safe from Sandy

– Sandy highlights need for private flood risk transfer via catastrophe bonds again

– Pennsylvania schools pension fund on ILS investment exposure to Sandy

– EQECAT doubles Sandy insured loss estimate to $10B – $20B

– The catastrophe bonds with bid/offer price movements after Sandy

– S&P expects Sandy to qualify as covered loss on aggregate catastrophe bonds