Catastrophe bond indices drop significantly on expectation of hurricane Irene loss

by Artemis on August 29, 2011

It’s two weeks since we last looked at the Swiss Re Cat Bond Performance Indices, so it’s time to see how their performance reflected the mood and state of the catastrophe bond and insurance-linked securities market over the last fortnight. As expected, both the price and total return indices have suffered a significant drop as hurricane Irene approached the U.S.

The catastrophe bond indices are a great indicator of sentiment in the cat bond market and one sentiment that is particularly well reflected in the indices is any expectation of loss. The indices both clearly show that cat bond market investors were expecting the worst as hurricane Irene approached the U.S. coastline and were very aware of the risk of losses to exposed catastrophe bonds. The indices price on a Friday so at the time they closed Irene was still expected to cause major damage to the northeast U.S. States.

Catastrophe bond investors and traders are a savvy bunch so the drop in price and total returns reflects both the selling off of exposed bonds and some price decreases across U.S. hurricane exposed cat bonds. As Irene has actually not been the major loss event that was feared we’d expect to see these indices recover rapidly unless any of the other tropical storms which are developing in the Atlantic threaten the U.S. coastline.

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). This index is now back at a low point for the year. It had previously been recovering the ground that was lost after the earthquake in Japan in March, but now Irene has set it back to its lowest point in the last 12 months. This index closed at 92.61 on the 26th of August.

Swiss Re Global Cat Bond Performance Price Return Index

Swiss Re Global Cat Bond Performance Price Return Index

Finally 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). Again, this index has dropped significantly in the last week as hurricane Irene approached landfall. We expect it to recover though and continue its attempt to regain the highs of February this year. It closed at 209.56 on the 26th August.

Swiss Re Global Cat Bond Performance Total Return Index

Swiss Re Global Cat Bond Performance Total Return Index

We will update you on the health of these indices in a fortnight by which time we suspect they will either have recovered their losses, or if another hurricane heads of the U.S. they will likely slip further. We’ll let you know which scenario occurs.

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