The Swiss Re Global Cat Bond Index has declined by the largest amount since 2012 on the threat posed by hurricane Matthew’s approach towards Florida, as mark to market losses flowed through into investor and brokers cat bond pricing expectations.
As hurricane Matthew approached last week it became clear that scenario forecasts showed a storm that could have caused a significant U.S. insurance industry loss, with the potential to trigger a number of exposed catastrophe bonds.
As ever during a major catastrophe threat, risk modelling firms provide their clients with data showing which are the most at risk cat bonds, this helps the ILS funds and their investors to better understand how the impact of a hurricane could threaten cat bond or other reinsurance linked investments.
These indications, of which cat bonds had the greatest chance of facing losses, flow through into valuations from brokers trading in cat bonds, as prices drop on some of the most exposed cat bonds and the end result is the indices that track cat bond pricing decline as a result.
The Swiss Re Global Cat Bond Price Return Index experienced its largest fall in four years as hurricane Matthew approached, Bloomberg reported. The index declined by 1.7%, which is the steepest drop since hurricane Sandy threatened the cat bond market in 2012.
With so much of the outstanding cat bond market exposed to U.S. hurricanes it is natural that the market faces mark-to-market losses, even if no individual bonds face any losses.
These mark-to-market losses flow through into cat bond fund and other ILS fund valuations as well, but should be recovered if all catastrophe bond positions escape losses, which should be understood within a matter of days.
The decline in the cat bond price index will likely recover over the coming week, as the impact of hurricane Matthew to reinsurance programs becomes clearer. If there is no loss to the cat bond market at all, the entire decline in prices will be expected to recover.
That doesn’t necessarily mean that the insurance-linked securities (ILS) market won’t face a loss though, as certain collateralised reinsurance or private ILS contracts, reinsurance sidecar investors and ILS funds could face some attritional losses, given the heavy use of reinsurance protection by some homeowners insurers in the regions affected by hurricane Matthew.
Again, that should become clearer as the week progresses.
Read our previous articles on hurricane Matthew: