Friday, September 20, 2013

Betting Against Natural Disasters One of The Best Investments Since the Financial Crisis

Here, let me fix that headline for you.
More after the jump.

From Quartz:
Betting on natural disasters has been one of the best investments since the financial crisis
Catastrophe bonds fell behind only silver, gold, and high-yield bonds as one 
of the best investments since the financial crisis.Deutsche Bank via Artemis
Catastrophe bonds—essentially a gamble on the likelihood of natural disasters—have been the fifth best-performing asset class since the financial crisis, according to research conducted by Deutsche Bank (and shown above). If you had invested your money at the fall of Lehman Brothers in September 2008, only silver, gold, and high-yield debt from the US and the European Union would have made you more money....

...So why have cat bonds done so well in the last few years? Because they have practically no relationship to financial markets. This doesn’t mean they’re particularly safe; we’ve written before about the possibility of a bubble forming in the insurance industry. Then again, when the entire market can shift after a few comments from Federal Reserve chairman Ben Bernanke, as it did this week—or rests on the health of dubious bets from the financial industry—gambling on the likelihood of a natural disaster doesn’t sound like such a bad idea....MORE
The major risks that cat bond owners are betting against are landfalling hurricanes in the U.S. and wind storms in Europe.

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.

In Europe there hasn't been a major insured catastrophe since Windstorm Xynthia which hit between 27 February and 1 March 2010. Xynthia's insured loss was €1.32 billion ($1.83 bil.) which did go beyond the primary insurers and hit both the re-insurers and the cat bonds.

This year's flooding in Central Europe was mainly covered by reinsurance, if at all, rather than bonds.

There is some cat bond coverage of U.S. tornadoes, after the giant Moore, Oklahoma EF 5 this spring Reuters reported:
"There are six bonds which cover around $1 billion of tornado risk in the United States. These bonds were sold by Chubb , Country Mutual and North Carolina Farm Bureau, and the United Services Automobile Association (USAA)."
None of which had to pay as the primary insurers were first in line and 2013 is the record low year for tornadoes.

So there you go. A paucity of action in the two largest cat-bond markets combined with a reach for yield is probably setting up a non-natural disaster for the cat bond marketers. 

If you want to know more the Artemis blog is a good place to start, we are fans.