Graphic: Catastrophe bonds tested

Hurricanes Harvey and Irma caused anxiety for catastrophe bond investors, driven by the near 16% drop in the Swiss Re Cat Bond index in Harvey’s immediate aftermath in the belief the damage would be historic both on the ground and to insurance companies. The 2017 season sets the bond category up for a stress test; how it fares will provide data for future issuers and investors alike.
Niche player: With about $33 billion in bonds outstanding, and $10 billion in issues in 2017, catastrophe bonds are still a small piece of the reinsurance business. Standard reinsurance dominates the $500 billion market.
Diversifier: Catastrophe bonds’ appeal to investors lies in their attractive risk/return profile and low correlation to other asset classes. Investor understanding has been a barrier to broader acceptance; supply is also a major limiting factor.
Bigger is better: The majority of U.S. issues since 2013 have broad U.S. and multiperil exposure, with fewer concentrated on single regions or events. Issues covering wider areas and more perils are typically larger and can sustain greater losses.
Bounceback: Returns of the Swiss Re Cat Bond index have been negative following hurricanes, but ended each year in positive territory. The index is expected to rebound post-Harvey, as damage from Irma was lower than forecasted.
Sources: Artemis, Bloomberg LP, Nephila Capital Ltd., National Hurricane Center
Compiled and designed by Charles McGrath and Gregg A. Runburg