The recent threat of Hurricane Matthew off the US east coast brought catastrophe bonds into focus, but investors might fare better looking at the wider index-linked securities market instead. Lynn Strongin Dodds takes a closer look.
“There have not been large insurance losses which is what you need to increase rates. We believe the opportunity set is wider and more diversified in the overall ILS market. Although there are investor concerns about the illiquidity, most are only one-year contracts so it should not be a big issue.”
Robert Howie, Mercer
As hurricane Matthew swirled perilously towards Florida’s coast in early October, the catastrophe bond market was braced for the impact with the Swiss Re Global Cat Bond Price Return index suffering its largest fall in four years. However, prices recovered as the storm blew out to sea and many have switched their attention to the larger insurance- linked securities (ILS) arena.
“The impact of the hurricane on South Carolina and Florida was less than forecast (the storm dropped from a category 4 to 1) and luckily the worst did not happen,” says Francois Divet, head of ILS at Axa Investment Managers. “As a result it was not a significant event and in fact, there has not been a major event (like Hurricane Katrina) since 2011 when losses totalled around $130bn due to Katrina and earthquakes in Japan and New Zealand, hurricanes in the US as well as floods in Thailand. We are now in the lower part of the reinsurance cycle and spreads have decreased.”
Robert Howie, a principal at Mercer, adds: “There have not been large insurance losses which is what you need to increase rates. We believe that the opportunity set is wider and more diversified in the overall ILS market. Although there are investor concerns about the illiquidity, most are only one-year contracts so it should not be a big issue. They may not have the liquidity of public equities, but they are also not like private equity investments where money can be tied up for a long time.”
