Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Catastrophe bond indices stable despite hurricane season nervousness


Catastrophe bond indices such as the Swiss Re pair have dropped in the last few months due to market nervousness about the impending U.S. Atlantic hurricane season. Forecasts for the season have predicted a high number of landfalling storms and a much more severe season than last year.

In 2008, the Swiss Re index fell by 7.3% due to a combination of hurricanes Ike and Gustav and the Lehmans Brothers fallout. So it’s no surprise that both of the indices have seen slight falls in the run up to the start of the hurricane season.

First the Swiss Re Cat Bond Price Return Index, tracking the price return for all outstanding USD denominated cat bonds (which you can quote and chart through Bloomberg here). You can clearly see the decline in this index which had been riding at a high until May. As hurricane season approached the index declined although it has now recovered slightly, probably because we are now over a month into the season with no impact to covered areas.

Next the Swiss Re Cat Bond Total Return Index, tracking the total rate of return for all outstanding USD denominated cat bonds (which you can quote and chart through Bloomberg here). Again, this index was sitting close to it’s high point up until May. Through June the index declined sharply but in the last week or so it has recovered slightly.

Nervousness about the potential impact of hurricanes to cat bonds will always cause these indices to fluctuate. A contributing factor right now is the volume of cat bond investments which are tied into U.S. hurricane risk areas. Investors get spooked as they don’t have the opportunity to diversify as much as they would like to which leaves them exposed. If there was more volume available to invest in diversified risks and areas we may not see so much fluctuation as investors can spread their risk more wisely.

So the indices actually look pretty stable as they have managed to recover a little. However, watch for them to fall further at the first sign of a major storm heading for the U.S. coast!

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