Insurance, Muni Bonds Not Dampened by Irene

Meredith Whitney prediction notwithstanding, performance strongly positive

Hurricane Irene may have roared up the coast last weekend, but she did not leave complete financial wreckage in her wake. Neither the insurance industry nor the municipal bond market was devastated, despite the billions of dollars in damage.

A healthy insurance industry, according to Steven Weisbart, senior vice president and chief economist at the Insurance Information Institute, combined with a “relatively moderate level of insured losses,” according to Moody’s Investors Service, resulted in insurers emerging perhaps a bit bruised but unbowed from Irene’s wrath.

Municipal bonds, despite warnings earlier this year and last from analyst Meredith Whitney, barely slowed during the week before the hurricane, and have been delivering returns that beat the S&P 500 handily. According to J.R. Rieger, vice president of fixed income indices at S&P Indices, they retreated only slightly in the week before the storm despite its multiple threats to municipalities.

Despite “low new issuance, sleepy summer trading in the secondary market and the uncertainty that Hurricane Irene brought to bear,” said Reiger in a podcast, “the S&P National AMT-Free Municipal Bond Index (investment grade, tax-exempt bonds) has seen its weighted average yield drop by 13 basis points for the month so far, giving up four basis points last week as the storm introduced additional uncertainty into the market. The index has seen a positive total return for Q3 so far of over 2.7% and a year-to-date return of 7.67%.”

While some states suffered more than others, returns have still been healthy, particularly for 10-year municipal bonds, which, says Rieger, provided nearly a 3% return for the month of August and more than 9.7% for the year.

Insurance companies also have not fared badly. As reported by NU Online News Service, Irene was an insurer, rather than a reinsurer, event; in a special comment, Moody’s said it expects high claim volume, but low severity: “Given the lower-than-expected wind speeds, most damage to homes is likely to be fairly moderate.”

Weisbart commented in an interview, “The industry as a whole is in very sound financial shape in spite of the extraordinary year as far as cat damage is concerned. The industry was very well prepared.”

Why? Because five out of the last 11 years have recorded losses in the $25+ billion range, creating a “new normal” that prepared the industry for recurring events of this magnitude. That lessened its reliance on reinsurers for Irene’s advent.

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