Asset Allocation

A Glass Half-Full Perspective for Institutional Investors After Storm's Destruction

In the wake of Hurricane Sandy--that has devastated a large part of the East Coast--here's how investors might look ahead.
Reported by Featured Author

(October 30, 2012) — Hurricane Sandy hasn’t left much in its wake to be happy about. 

Power is out for much of the Tristate Area. New York City’s subway system has ceased operating, and it could be days before it picks back up. The surrounding area’s infrastructure is hurt by high winds and fallen treas. “I don’t think words like ‘catastrophic’ or ‘historic’ are too strong to explain the impact,” New York Gov. Andrew Cuomo has said. New Jersey Gov. Chris Christie described the devastation as “unthinkable.” 

For institutional investors making lemonade out of lemons, however, opportunity may abound in the catastrophe bond sector–in which insurers transfer risks associated with natural disasters to capital markets investors. 

“I’ve had conversations recently on how institutional investors can best position themselves looking forward, following situations like these,” Jeff Schutes, global leader of manager research at Mercer Investments, tells aiCIO, noting that catastrophe bonds may be where institutional investors need to focus more attention. Catastrophe bonds have attracted heightened interest from pension funds, exemplified by Europe’s second-biggest insurer revealing last March that its funds investing in catastrophic bonds may more than triple. Axa Investment Managers, the asset-management unit of Paris-based Axa, said at the time that its funds investing in cat bonds and other insurance-linked securities may balloon as insurers manage their exposure to natural disasters by transferring potential losses to investment funds. 

In August 2011, after Hurricane Irene pummeled the East Coast (to a much lesser degree than Sandy), Willis Capital Markets & Advisory noted that the cat bond sector is exposed to nearly 70% of US hurricane risk. Bill Dubinsky, managing director of the firm, said at the time that as reports from weather forecasters emerged on Hurricane Irene’s intensity, some investors attempted to “trade in and out of bonds…to rebalance their positions.”  

Ryan Bisch, a principal at Mercer, explains that the preliminary reports on expected insured loss from Sandy are in the range of $7.5 billion to $20 billion. “The loss will be higher than Irene last year. The damage is significant but well below Hurricanes Katrina, Rita, and Wilma, which led to $57 billion in insured loss in 2005, and Hurricane Ike, which cost $12.5 billion in 2008.”

Still, the cat bond sector has been very theoretical up to this point, Schutes says. “It would be good to use a situation like this to generate interest, and we seem to be having more and more of these catastrophic-type events now.”  

In response to how insurers and other investors are potentially responding to the hurricane, Schutes says: “While Hurricane Irene wreaked havoc, it was more of a local event. Hurricane Sandy has been a bigger blow and it’s been more visible, with markets closed. And while investors see a lot of potential for catastrophe bonds, I don’t know how quickly they can react to the situation. So, this might be a wakeup call.”