From Bloomberg, January 20/21:
- Insurance-linked securities behind 2023’s best hedge fund play
- Weather, inflation delivered the perfect cocktail last year
For hedge funds, the science of catastrophes helped generate the best returns of any alternative investment strategy last year.
The calculus around natural disasters such as hurricanes and cyclones fed record gains at funds managed by firms including Tenax Capital, Tangency Capital and Fermat Capital Management. All three delivered results that were more than double an industry benchmark, according to public filings, external estimates and people familiar with the funds’ numbers.
Behind those record returns were bold bets on catastrophe bonds and other insurance-linked securities. So-called cat bonds are used by the insurance industry to shield itself from losses too big to cover. That risk is instead transferred to investors willing to accept the chance that they may lose a part of — or all — their capital if disaster hits. In exchange, they get rewarded with outsize profits if a contractually pre-defined catastrophe doesn’t occur.
“I don’t think we’ve seen a market like this since cat bonds were born in the 1990s,” said Toby Pughe, an analyst at Tenax. The London-based hedge fund’s portfolio of about 120 of the securities delivered an 18% return last year.
The best hedge fund strategy of 2023 was a bet on insurance-linked securities (of which catastrophe bonds are the dominant sub-category), which generated over 14%, according to Preqin, a consultancy that provides data on the alternative asset management industry. Preqin’s benchmark return for the industry — across strategies — was 8%. That compares with a 19.7% gain in the Swiss Re Global Cat Bond Performance Index Total Return.
Cat bond issuance has been turbo-charged by concern about extreme weather events fueled by climate change, and by decades-high inflation that’s added to the cost of rebuilding after natural disasters.
But the seeds of 2023’s record cat-bond performance were planted several years ago.
The securities were generally a dud bet as recently as 2017, when several large hurricanes slammed into the US and investors were called on to cough up the cash needed to cover property losses. Returns were also underwhelming in 2019 and 2020.
Then, hurricane Ian hit Florida in September 2022.
Ian was the most destructive storm in the state’s history, causing $100 billion in losses of which only 60% was insured, according to Munich Re. The event led insurers to shift more of the risk on their books to the capital markets. And with much higher reconstruction costs amid rampant inflation, the stage was set for the market for cat bonds to come roaring back.
“The increase in insured values on the residential side went from 8% to 20%,” said Jean-Louis Monnier, global head of insurance-linked securities at Swiss Re. “Insurance companies needed to buy more cover.”....
....MUCH MORE
Very related, January 13:
Catastrophe Losses and Climate: "Global Disaster Losses: 1990-2023"
