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Cat bond market back to pre-crisis returns

Cat bonds performed strongly in 2010, according to Swiss Re's basket of indices for the asset class, with the reinsurer hailing strong performance indicators as a sign the market has fully recovered from the financial crisis.

The Swiss Re Global Cat Bond Total Return Index - which takes both coupon income and secondary resale value to calculate returns for all nat-cat bonds in the market - showed an 11.29 percent return for 2010.

This was the fourth time in the past five years the index turned in double-digit returns.

The index's market value also rose above par for the first time since August 2005 to

a year-end value of $12.2bn, on strong demand for cat bonds.

Meanwhile, spreads for new issuance are back in line with the pre-crisis levels noted in 2007, Swiss Re said.

The weighted average spread, or insurance-related coupon, at the start of 2010 was 7.02 percent and reached an all-time high of 7.64 percent by year-end. This was skewed upwards by high issue spreads in 2009, which reflected caution from investors as the ILS market re-opened after the financial crisis.

The increasing risk profile of the cat bond market - with an average expected loss of 1.76 percent compared to 0.75 percent when the index began in 2002 - has been a key driver in pushing returns up over time, Swiss Re noted. In 2002 the average spread was 5.11 percent.

After a strong year for European issuance, the index's exposure to Euro-denominated bonds has peaked at 17 percent. However, US wind exposure has also been growing, peaking at 72 percent in June.

Swiss Re's US wind bond index, which is limited to US wind bonds only, returned 9.73 percent in 2010, while the USD index - which covers US dollar-denominated bonds - returned 11.37 percent.

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