As storms approach catastrophe bond returns fall

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Between the 29th August and the 5th September as hurricane Gustav hit New Orleans and Hanna and Ike headed for the U.S. and Caribbean the Swiss Re Cat Bond Total Return Index fell 0.3%, it’s first decline since the severe midwest flooding earlier this year.

You can chart the Swiss Re Cat Bond Index over on the Bloomberg website.

The decline signifies a nervousness amongst investors in catastrophe bonds brought on by the possibility of a loss being incurred. So far no losses have been reported but with Hurricane Ike now heading for the Gulf of Mexico and the U.S. coastline we expect the index to decline further over the next few days.

Issuance is still stagnant in the catastrophe bond market due to the abundance of cheap reinsurance and the increasing complexity of actually getting a cat bond off the ground. Regulators and rating agencies have been getting nervous since the sub-prime fallout and A.M. Best say that data is of increasing importance as rating agencies look for cat bonds to be structured with clean data. Best have also said that in order to get the market back off the ground it will take a mega-catastrophe with losses of $30 to $50 billion. More on that from Business Insurance.

However, Standard & Poor’s have issued a report stating that cat bonds are here to stay and that while volume issued will ebb and flow it expects insurance linked securities to continue to contribute significant capacity to the sector. It seems that cat bonds will in time prove to have their own cyclical nature much like re/insurance does.

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