A follow-up to the July 28 post "Hurricane Watch: Worldwide Accumulated Cyclone Energy Index Approaching 50-Year Low. And: A Risky Insurance Bet.":
As promised yesterday in "Bill Gates takes on hurricanes. And: A Quiet Tornado Season":
Two months into a very quiet hurricane season, and following a quiet tornado season*, we are coming into the two most dangerous months for hurricanes. Until we get, at minimum, a tropical storm, I'll be posting on ancillary topics....Don't go running out to buy the property/casaulty insurers now. That opportunity has passed.
I'm thinking of some sort of pair trade or maybe a straight directional bet, against.
There are three insurance ETF's, unfortunately none are pure-play p/c, each has health/life exposure.
The SPDR KBW Insurance (KIE) has the most life/health, the iShares Dow Jones US Insurance (IAK) the least, with the PowerShares Dynamic Insurance (PIC) in between. Here's the IAK vs. the S&P 500 over the last year. Down harder (think AIG), up faster...
...So why am I thinking of betting against? The Atlantic Multi-Decadal Oscillation has gone positive again after five months of negative anomalies. The wild card is, of course, El Nino which has two effects, wind shear which stops hurricanes from forming but which, if they do form, raises the chances of an East Cost vs. Gulf Coast hit by a couple percent....
Today's story, from Bloomberg:
Catastrophe bonds, used by investors to bet against natural disasters, climbed to their highest level this year as hurricane outlooks called for a calmer season.
The Swiss Re Cat Bond Price Return Index advanced 0.3 percent to 90.56 on Aug. 14, the sixth straight weekly gain, as investors bet insurers are less likely to collect on the securities.
Insurers, including Chubb Corp. and Assurant Inc., sell the bonds as an alternative to reinsurance. If a disaster strikes, the insurer uses the money to pay claims and bond buyers face losing their investment. The National Oceanic and Atmospheric Administration revised its hurricane outlook this month to a near-normal to below-normal season. The bonds faced pressure in 2008 from the credit crisis and an above-average storm season.
“If you don’t have any hurricanes threatening the U.S., the investor base gets a lot more comfortable with owning these securities in hurricane season,” said Brett Houghton, a fixed- income trader at Rochdale Securities LLC. “There is the perception of reduced risk profile of the bonds.”>>>MORE