Catastrophe bonds are one of the few clearly attractive asset classes

by Artemis on August 16, 2012

Our readers are well aware that catastrophe bonds are a hot asset class at the moment, with growing interest being shown from an expanding spectrum of investors, and a growing market thanks to high levels of issuance in 2012. As an asset they offer an extremely attractive source of returns to investors, generally ranging between lower spread levels around the 3%  mark up to 20% or sometimes even higher.

Of the cat bonds issued in 2012 the average spread, or coupon, paid to investors is around 9.5% to 10%, well in excess of most other asset classes. With investors struggling to make returns from bonds, treasuries offering negligible returns and equities exhibiting the type of volatility that is enough to put off even the most adventurous of investors, cat bonds are growing in stature and the word is getting out into the investment and capital markets that they are an asset class that deserves a closer look.

We wrote yesterday that non-specialist investors are increasingly participating in the insurance-linked securities and cat bond market, with growing allocations coming from pension funds, endowments, mutual funds and even sovereign wealth funds. By non-specialist, we refer to investors and funds who are not primarily involved in ILS but for whom ILS and cat bonds make up a small amount of an overall portfolio. It’s not just these large investors that are recognising the value that can be gained from an allocation to cat bonds or ILS, smaller non-specialist investment managers and funds are increasingly getting involved as well.

One of those is a well know investment manager Baillie Gifford. They manage and run many different investment strategies and funds which invest in a huge variety of assets, from equities to ILS. One of the investment strategies they manage is Mid Wynd International Investment Trust PLC, a £66.7m investment company that invests predominantly in international quoted equities, but which has an allocation to ILS and catastrophe bonds. Specifically Mid Wynd has a 1.1% allocation to the CATCo Reinsurance Opportunities Fund and a 1.1% allocation to the Everglades Re cat bond. The company is open to individual investors, so providing one of the rarer opportunities for individual investors to gain a position in ILS and cat bonds, albeit a small one.

In their latest annual report the chairman of Mid Wynd includes some interesting comments on the state of the investment markets right now and where opportunities lie. With their primary focus being on equities the chairman says that opportunities there range from moderately attractive to rather expensive with the global economic situation presenting a subdued backdrop for equity investors.

Outside of equities, the chairman reports that there “appear to be few clear attractive asset classes”. He goes on to cite catastrophe bonds as one of those which are attractive right now, and says that these clear attractive asset classes make up “important and uncorrelated, if modest, elements of Mid Wynd’s portfolio”.

So Mid Wynd certainly appreciates the unique opportunity which catastrophe bonds and ILS offer to investors in the current financial climate; attractive returns, uncorrelated from the broader financial markets and as a result a good addition to a portfolio even when targeted at individual investors.

We suspect that there will be many other investment funds, trusts and companies out there who have quietly allocated a small portion of their assets to the insurance-linked strategy or cat bond asset class in an effort to hunt out a decent return to bolster their return from other asset classes. Interest from these types of investment firms and managers will only help to further promote the ILS asset class to both investors and the investment manager community, which will in turn increase interest in, and if the right opportunities exist, allocations to, the asset class.

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