MODERNINVESTOR.COM • 14 •
4
THEMES & IDEAS
SPECIALIST FIXED INCOME
t
S
Their high yields once made them ideal for diversifying
portfolios, but Luca Rossi asks whether CAT bonds now
as risky as the disasters they insure against
depe ds o the isk i he ited i the o d,
a gi g f o % to % pe ea , the odiied
du aio is . ea a d the a e age ai g is BB.
The ILS a ket, o sisi g of CAT o ds
a d ollate alised e-i su a e, has g o
sig ii a tl i e e t ea s, a d is o esi ated
to e o th $
illio . Roughl $
illio
of this is i ested i atast ophe otes a d
$
illio i p i ate ILS t a sa io s.
THE DEFAULT RISK
$45bn
VALUE OF INSURANCE-LINKED
SECURITIES MARKET
i d speed i fo aio e ui kl a d
a e if hethe the CAT o d ill e
t igge ed o ot.
A i de it o d is t igge ed a spe ii
i su a e loss. If the da age of a ea th uake
ea hes this t igge , the CAT o d i esto
sta ts to lose o e . As a i su a e loss is
ot al ulated i
ediatel ate the e e t a d
takes so e i e, eeks a d o ths, i de it
o ds a e fa less t a spa e t to
holde s, ut pa a highe oupo
i stead of thei pa a et i
ou te pa ts to o pe sate the
i esto .
The ajo isk fo the i esto is
a default of the CAT o d. If a
e e t o u s, it t igge s the o d
to pa pa ts o the total of the o i al
a ou t to its spo so .
The ajo t igge s a e pa a et i o i de it
t igge s. A pa a et i t igge is usuall dei ed
ith the hurricane season approaching its peak, natural
i esto s i o de to oost the p oita ilit
as a i d speed o Ri hte s ale eadi g. Fo
disasters are making their way onto the investment
a d di e sii aio of thei po folios, e plai s
e a ple, take a CAT o d o the a ket that
agenda. And so are catastrophe bonds, high-yield
ho the CAT o d a ket o ks a d ho it
o e s ea th uake isk i Japa ith a Ri hte
debt instruments that are usually insurance-linked and meant
performed in case of two major, recent natural
s ale eadi g of o e tha . If a ea th uake
to raise money in case of a calamity such as a hurricane or
disasters.
earthquake.
happe s i Japa , a d the ea th uake i te sit is
ARE THEY WORTH IT?
CAT BONDS UNWRAPPED
CAT o ds ha e a lo o elaio to t adiio al
Qua itai e easi g p o pted i esto s to e
ae
lo e tha Ri hte s ale , the CAT o d ill ot
asset lasses a d ofe a at a i e ield. The
not only corporate and sovereign risk, but also
Insurance companies needing re-insurance
e t igge ed a d the i esto ea s the p e iu
lo o elaio
akes se se – a ea th uake
environmental risk by insuring against losses from
a u p ote io f o a e-i su a e
a d gets a k the o i al a ou t ate the
has o depe de
to de isio s of e t al
natural disasters. Prominent asset allocators such
o pa o t a sfe the isk
lifei e of the ote.
a ke s, ields, u e ies o sto k a kets.
as Wa e Bufet a e stee i g lea of CAT o ds
spo so i g a atast ophe o d. Natu al
If a ea th uake happe s ith Ri hte s ale ,
Si e
, the ha e o a e age deli e ed
atast ophes a e fu da e tall
because they simply no longer pay.
the CAT o d holde loses $ . If the ea th uake
. % pe a u , ith a olailit of a out %.
u o elated to a othe asset lass. As
So the uesio is: a e CAT o ds o th it?
happe s ith Ri hte s ale . , the holde loses
Yields also lo e ed i this asset lass, ut a t pi al
a esult, the i esto gai s a di e sii aio
According to Harald Steinbichler, managing
% of his i est e t a d if the ea th uake
oad di e siied CAT o d fu d sill has a u e t
e eit addi g a i su a e-li ked
pa t e of Ge a - ased A essu , the a e sill
ea hes Ri hte s ale o a o e, he sufe s
se u it ILS to a i est e t po folio.
ield of a out % pe a u . I esto s ho
a good a to pa i ipate i the i su a e usi ess a d
a total loss of his i est e t. The ad a tage
A CAT o d usuall has a du aio of th ee
de ide to i est i the ha e a t pi al allo aio
simultaneously avoid equity risk, management risk or interest
of pa a et i o ds is that the a e e
ea s a d pa s a oupo li ked to the th eeof % to % of total i est e t allo aio i this
rate risk.
t a spa e t, e ause if a ea th uake happe s,
o th Li o ate plus a p e iu . The p e iu
asset lass.
Stei i hle , ho ofe s i he st ategies to i situio al
the i esto usuall gets the Ri hte s ale o
W
42
4 • 14 • MODERNINVESTOR.COM
THEMES & IDEAS
HURRICANES
KATRINA & SANDY
I
, t o CAT o ds e e t igge ed e ause
of Hu i a e Kat i a. o e CAT o d lost % of
p i iple, the othe
%. Thei sp eads i eased
f o . % to % a d the isk pe epio ha ged.
Most of the fu ds pe fo ed slightl posii e i
.
Hu i a e Sa d happe ed i O to e
. No
CAT o d as t igge ed, ut o i g to a highe isk
pe epio , thei p e iu s i eased to a le el
of % o e Li o . The otes sufe ed a a k to
a ket loss of a out - . % i No e e
,
ut A essu s lagship fu d pe fo ed + . %
fo the hole
. CAT o d sp eads de eased
sig ii a tl ate Hu i a e Sa d .
At p ese t, A essu p o otes t o fu ds:
a di e siied CAT o d fu d ith a u e t
ield of . % as of e d of Jul
,a d
a o e d a i o e, hi h has a
highe u e t ield a d is u h
o e fo used o US i d isk as it
ofe s high p e iu s.
SPECIALIST FIXED INCOME
i
n
w
THE BUYER
RETO JUNG
WMPARTNERS WEALTH MANAGEMENT
DEPUTY HEAD CIO
We e e i esi g i CAT o ds a k i ea l
e ause of the t ue o - o elaio to t adiio al asset lasses, lo olailit
of asset p i es a d at a i e ield. At the egi i g of
, ield e pe taio s e e a out - % pe a u .
Be ause the e as a lot of de a d f o i situio al i esto s, e pe ted ields fo plai a illa CAT o d fu ds ha e e o e
lo e o ada s, a ou d - %. We a e pla i g to ope up ou i est e t u i e se to o e oad i su a e-li ked
se u iies ILS st ategies, e e though the e a e highe li uidit isks asso iated.
We i ested i this pa i ula T el e Capital st ateg e ause it is a plai a illa CAT o d st ateg ased o isks
su h as ea th uakes, i d a d sto s, hi h akes it o e li uid. It has less othe ILS e posu e su h as a ade
atast ophes like te o is a d ai pla e ashes. We also liked the est i io to a a i u of % isk o o e si gle
i ide t. So e e e uite isk-a e se at the e pe se of etu .
T el e Capital as the o l a age ofe i g the a o e e io ed st ateg [p o ided
A essu ], espe iall the est i io to a a i u of % o o e si gle e e t. We e e ell
a a e that this est i io o es ith less e pe ted ield tha i esi g full -ledged i to US
i d isks, ut e sill liked it.
At p ese t, CAT o d fu ds a ou t fo - % of ou a dated po folios. The etu
has ee a out % si e Ma h
.
g
$20bn
INVESTED IN CATASTROPHE NOTES
43