This Market is One Cool Cat

September 15, 2017

Hurricanes Harvey and Irma substantially impacted the lives and infrastructure of all that was in their paths. They also directly impacted certain investments, namely catastrophe bonds, (“cat bonds”). Catastrophe bonds can help diversify a bond portfolio’s rate, credit and currency risk with non-correlating nature risk. Cat bonds are issued by insurance companies that pool property and casualty policies. They pay coupons to the bondholder using the policy premiums received. However, when a natural disaster occurs, the principal of a cat bond can be used to pay insurance claims on the pool of policies. Historically, annual cat bond returns average 5% to 10%.

This week’s chart shows the Swiss Re Cat Bond Index on the top compared to the Credit Suisse High Yield Bond Index on the bottom. Hurricane Harvey caused only a negligible 0.3% decline in the cat bond index followed by a 0.5% rebound, since the most severe damage came from flooding. Flooding is generally not covered by cat bonds, as cat bonds primarily cover hurricane damages associated with wind. However, Hurricane Irma caused a 16% initial decline, as the index has roughly 20% exposure to Florida hurricanes. Moreover, the state of Florida requires that all homeowners hold hurricane insurance.

Hurricane Irma qualifies as one of the top 10 costliest natural disasters ever recorded, with damage estimates ranging from $50 billion to $100 billion. It is akin to the 2008 housing crisis for the corporate credit and equity markets. The bottom chart shows the high yield bond index declining during the 2008 housing crisis by 33% peak-to-trough, which was over twice the initial decline of the cat bond index due to Hurricane Irma. With recent damage estimates adjusted downwards from an initial overshoot, the Swiss Re Cat Bond Index has already rebounded by 10% only a few days after Irma struck. This makes its net decline 6% to-date as the index continues to recover, showing inherent resilience in the cat bond market. Our thoughts are with those affected by these recent disasters.

Print PDF

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Related Content


The “Fix” Is In!

The strength of the U.S. economy over the last several quarters has surprised many investors, as consensus expectations from the…


The Emergence of Argentinian Equities

Argentina has faced myriad economic headwinds in recent time, including hyperinflation, currency-related difficulties, and a series of defaults on its…


Is Bitcoin Fairly Valued?

Despite mixed performance to start 2024, bitcoin finished the first quarter up roughly 68%. Buoyed by a broad weakening of…


1Q 2024 Market Insights Video

This video is a recording of a live webinar held April 25 by Marquette’s research team analyzing the…


Mind the Gap

Any ride on the London Tube reminds riders to mind the gap: Beware the space between train car and platform…


Japan: This Year’s Vacation Recommendation

Foreign investment isn’t the only thing streaming into Japan. In 2023, the number of travelers to the country surpassed long-term…

More articles

Subscribe to Research Email Alerts

Research Email Alert Subscription

Research alerts keep you updated on our latest research publications. Simply enter your contact information, choose the research alerts you would like to receive and click Subscribe. Alerts will be sent as research is published.

We respect your privacy. We will never share or sell your information.

Thank You

We appreciate your interest in Marquette Associates.

If you have questions or need further information, please contact us directly and we will respond to your inquiry within 24 hours.

Contact Us >