Cat Bonds Hit Record Issuance in 2013 | Chief Investment Officer

(October 15, 2013) — Catastrophe bonds are thriving, recording $6.24 billion in issuance so far in 2013, according to the Artemis Deal Directory.

Outstanding cat bond risk capital has reached a record high of $19 billion, Artemis found.

“The market jumped to approximately $19.4 billion in size today, with the completion of a recent deal, and now looks set to hit at least $19.6 billion in size by the end of the month, once the latest cat bond to come to market completes,” Steve Evans, owner and editor of Artemis, said.

AXA’s Calypso Capital II Ltd. was issued this week, ushering the cat bond market into the alternative asset class as a potential major player among institutional investors. The $476 million deal received a BB- (sf) rating to its class A notes and B+ (sf) rating to the class B notes from Standard & Poor’s.

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Artemis said as soon as the $175 million Catlin’s Galileo Re Ltd. was issued, cat bond issuance could reach $8 billion by the end of the year.

“The pipeline for new catastrophe bond deals looks strong for the rest of the year,” Evans said. “There are a number of deals which are likely to be renewed as well as some first-time cat bond sponsors waiting to bring deals to market.”

Cat bonds emerged in the mid-1990s, after investors experienced significant losses from Hurricane Andrew in the southern states of the US. Originally created to insure insurers from catastrophes, they now attract much attention from institutional investors.

The Economist found that institutional investors have grown their appetites for cat bonds particularly due to their ability to generate high yields that are relatively uncorrelated to the markets.

However, the substantial growth of the cat bond market could have dangerous implications, The Economist said. Inexperienced investors could distort prices, “creating a frothy ‘shadow insurance’ sector with systemic implications.” Unreasonably high prices could also push investors out of the asset class, causing a drop in yields.

Despite concerns, recent figures have indicated cat bonds are here to stay.

“With as much as $50 billion of capital from institutional investors currently in the global catastrophe reinsurance market and predictions for much more capital to flow into the space over the next few years, this sector is one to watch,” Artemis stated.

(October 15, 2013) — Nonprofit foundations and endowments are facing significant investment governance challenges, according to a survey.

SEI reported that from a survey of 165 US not-for-profit endowments and foundations with $16.4 billion in total assets, many reported difficulties with changing managers and asset allocation, as well as focusing on strategic initiatives.

“Not only are [nonprofit investors] managing spending policies, volatile markets, long time horizons, and complex investment line-ups in support of the core mission, but they are often limited in time and resources, and sometimes investment expertise,” Mary Jane Bobyock, director of nonprofit advice at SEI, said.

According to the poll, three-quarters of surveyed portfolios was managed by an investment committee that met only four times a year on average. More than a third said they hired consultants and 18% reported to have used an outsourced partner.

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Only about a quarter of those surveyed said they work with an in-house investment team, but the average of the staff was less than one person.

Nonprofit portfolios were largely governed by an average of seven people on an investment committee, the report said. However, only three of the seven members had any investment experience.

More than half of the organizations admitted to not having a concrete term limit for their investment chair.

Although a large majority, 98%, said they employed a formal investment policy statement, defining asset allocation, rebalancing, goals, and performance measurements, these formal policies were mostly overlooked, without reviews or changes.

“Having a well-defined investment policy statement and investment governance process can help streamline decision-making and create a uniform investment strategy, which are fundamental to executing important portfolio decisions in a timely and nimble manner,” Bobyock said.

SEI identified major necessary components for good governance that many nonprofit investors found challenging.

More than two-thirds of participants found difficulty making timely manager changes, with almost 50% saying it took three months to more than a year to fire a manager.

“This can greatly impact portfolio returns and spending, as the under-performing manager continues to manage the organization’s assets during that time,” SEI said.

Altering allocations also was a long and enduring process for nonprofit investors, the report found.

About half of those surveyed reported that it takes three months to more than a year to agree on an asset allocation change to their portfolios while only 17% were able to make “nimble portfolio changes.”

Quarterly investment committee meetings were largely ineffective as 67% of participants said they had difficulty focusing meetings on strategic investment initiatives due to distractions from “tactical issues,” SEI said.

And lastly, the survey concluded a majority of nonprofit organizations, 77%, were not well equipped to keep committee members educated on complex investment topics.

SEI said hiring an outside partner could help resolve such governance issues.

“An outsourcing provider can be a crucial partner in the investment governance strategy for a nonprofit, providing timely manager and asset allocation changes, assistance in creating an effective investment policy statement, access to committee education materials, and comprehensive reporting towards goals,” the report said.