Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Slight dip in cat bond index as fate of Mariah Re becomes clearer


Two weeks have passed since our last look at the Swiss Re Cat Bond Performance Indices to assess how their performance had improved, or otherwise. Both of the indices climbed strongly during the week ending the 30th September but in the last week ending the 7th October the climb faltered caused by the impact of another loss to cat bond investors becoming clearer.

The cat bond market in the last fortnight has been fairly quiet until Q4 issuance sprang to life with the launch of the Calypso Capital Ltd. Series 2011-1 cat bond by AXA. It’s expected that we will see a steady flow of new deals being marketed over the rest of the year, appeasing investors who have been seeking new and diversified opportunities. The good news of a new transaction coming to market has been tempered by the news that covered losses are mounting for the Mariah Re 2010-1 tornado affected cat bond. Now just under $35m away from default and incurring a loss to investors, further mark-to-market losses have been seen on this bond. At the same time the news of increasing covered losses for that deal mean that actual incurred losses to investor principal have grown on Mariah Re 2010-2 with investors now on the hook for as much as $65m.

First 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). The negative news on the two Mariah Re transactions is suspected to be the cause for a dip in the cat bond price return index in the last seven days. Whenever a cat bond is threatened with default or losses, the notes lose value in the secondary market with what are called mark-to-market losses causing downward pressure on the indices below. This index closed on the 7th October at 94.72, we’d expect it to rise again unless there is further negative news about Mariah Re or a hurricane threatening land and losses.

Swiss Re Global Cat Bond Performance Price Return Index

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 the basket of natural catastrophe bonds (which you can quote and chart through Bloomberg here). This index hasn’t been as badly impacted by the Mariah Re news and has risen over both of the last two weeks, however growth was slower last week as the impact of mark-to-market losses became apparent. This index closed at 216.39 on the 7th October, another all time high point.

Swiss Re Global Cat Bond Performance Total Return Index

Swiss Re Global Cat Bond Performance Total Return Index

A further update on how covered losses have grown for the Mariah Re cat bond is expected from Standard & Poor’s at the end of the month so we can expect the situation for that deal to worsen and there to be additional mark-to-market losses after that announcement. We’ll update you on these indices in two more weeks.

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