...The major risks that cat bond owners are betting against are landfalling hurricanes in the U.S. and wind storms in Europe.So now, after an 11-year run, the RIA's decide hey, ho, let's go.
The only major payout on a hurricane for the last seven years was Sandy which itself was a bit of a frankenstorm--an extratropical storm running into a nor'easter and arriving in the New York/New Jersey area at high tide, and not just any high tide but the full moon high tide. Fortunately for the bond buyers they hadn't been offered the opportunity before Sandy hit....
As the odds of a hurricane-favoring La Niña setting in just hit 75%.
And yields on cat bonds hit record lows.
See also our thinking in January, after the jump.
From Institutional Investor:
Registered investment advisers are the latest converts to the asset class, which aims to profit by betting against natural disasters
The low-Yield Investment climate has left registered investment advisers searching for new opportunities to make it rain for their clients. Some believe theyve found a way as long as that rain doesnt come with flooding and gale-force winds. Catastrophe bonds, insurance-linked securities tied to natural disasters, have long been a source of yield for alternative investment firms. Now theyve made it onto the radar of U.S. wealth managers looking to deliver returns with relatively little risk.January 28, 2016
When clients life savings are at stake, cat bonds offer opportunities on several levels, says Sam Sudame, director of research at SingerXenos Wealth Management, an RIA based in Coral Gables, Florida, that has allocated 5 percent of its $1.2 billion portfolio to the asset class. By its very nature, a quality cat bond portfolio is diversified and offers powerful return compared to the risk both crucial for private wealth management.
Family offices in Europe and in East Asia, especially Japan, have been investing in catastrophe bonds for more than a decade, says John Seo, co-founder of $5 billion Fermat Capital Management, a Westport, Connecticutbased specialist in the paper. Pioneered 20 years ago by Warren Buffett and Allstate Insurance Co. in the wake of Hurricane Andrew, which devastated Florida, catastrophe bonds were the domain of alternative managers at first.
particularly after the 200809 financial crisis, lured by the promise of returns uncorrelated to a weak market. As they seek to shore up lackluster 60-40 portfolios, RIAs are the latest to embrace what Seo jokingly describes as an unrisky for a risky asset class.
A catastrophe bond passes on the risk of what insurers call peak perils from reinsurance companies to investors. Actuaries calculate the likelihood of, say, an 8.5 magnitude earthquake hitting Southern California or a Category 5 hurricane battering the Gulf Coast and price the security accordingly.
If the event covered doesnt occur before the bond matures the term of the bond is typically three years the investor can receive a sizable coupon payout, often LIBOR plus a spread of 3 to 20 percentage points. (Given catastrophe bonds popularity, yields have dipped in the past couple of years.) If a natural disaster of the magnitude outlined in the prospectus does strike, though, the bond triggers and the premium goes to the sponsoring reinsurer to help cover policyholder claims.
"Is the re/insurance industry really prepared for a large tail event?"
The plan is to lay any claims over about $50 billion on taxpayers.
That's insured losses not total losses.
Short the re/insurers this year. The probabilities are shifting against them and although it's not a lock it is still the way to bet....