Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Swiss Re cat bond index stable, small rise on spread widening

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The catastrophe bond market index calculated by Swiss Re Capital Markets stabilised at its last calculation on Friday 14th October 2022, with a slight rise seen due to spread widening as secondary trades picked up pace following hurricane Ian.

trading-stock-shares-derivativesAt the same time, there was little movement on any of the catastrophe bonds considered most exposed to losses from hurricane Ian and the storms significant impact on Florida.

The Swiss Re Global Cat Bond Index provides a broad measure of the cat bond market, as calculated by Swiss Re Capital Markets, the insurance-linked securities (ILS) specialist arm of the global reinsurance firm of the same name.

Having tracked catastrophe bond market performance with its cat bond indices since 2007, the Swiss Re cat bond index is seen as a reliable bellwether for the health of the cat bond stock and marketplace.

As we previously reported, the Swiss Re Global Cat Bond Index was down roughly -10% at the indices’ first calculation point after hurricane Ian’s landfall, on September 30th.

Meanwhile, the Swiss Re US Wind Cat Bond Performance Index, that tracks the aggregate performance of USD denominated cat bonds exposed exclusively to US Atlantic hurricane, had fallen by a more significant approximately -32%.

A week later, when the index was next calculated, the Swiss Re Global Cat Bond Index had fallen an additional -0.27%, as prices continued to adjust in the wake of hurricane Ian, while the Swiss Re US Wind Cat Bond Performance Index fell an additional -0.72%.

But, as of the index calculation on October 14th, we understand both of these cat bond indices saw slight rises.

The Swiss Re Global Cat Bond Index rose by just 0.01%, while the Swiss Re US Wind Cat Bond Performance Index rose by almost 0.42%.

While this is not any sort of recovery, it is another encouraging sign that suggests the cat bond market has priced in all of the current expectations of losses from hurricane Ian.

We understand that there has been little to no additional movement in cat bonds exposed to hurricane Ian losses.

This is because the market, of cat bond fund managers and investors, is awaiting formal loss notifications from cat bond sponsors, that will provide greater clarity of the eventual impacts.

Positively, secondary market trading of cat bonds has picked up pace after Ian as well, although a lot of the activity continues to be managers and investors adjusting portfolios in the wake of the storm and in anticipation of losses.

Some sources also suggest there is an element of freeing capital going on too, among some ILS fund managers, which may be partly to take advantage of new investment opportunities.

Spread widening seen in secondary trades has contributed to the slight rise in the indices, we’re told.

Which does at least reflect the healthy functioning of the cat bond market, even after a major catastrophe event with serious ramifications for reinsurance and insurance-linked securities (ILS).

As we explained in our article from a little earlier today, realised losses from hurricane Ian for the catastrophe bond market could end up being as little as half of the mark-to-market-wide decline seen in the outstanding cat bond market.

The stabilisation of the Swiss Re cat bond indices and their slight rise week-on-week could be supportive of the fact that the cat bond market has effectively priced in the loss potential of hurricane Ian at the top-end of expectations, as Lane Financial also recently suggested.

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