Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Some investors seek value in catastrophe bonds after Japan quake


Catastrophe bond and catastrophe insurance-linked security pricing has dipped in recent weeks as the market comes to terms with the possible losses triggered by the earthquake in Japan on 11th March. Cat bonds are generally trading at lower prices than before the disaster and some deals which are most exposed to the events in Japan are trading at rock bottom prices.

For some investors, the current market climate provides an opportunity to tap into the market and the high returns normally experienced by cat bond investors for a lower initial outlay. Prices are expected to stabilise once the final amount of losses borne by catastrophe bonds is understood, which should be within a few weeks, meaning that investors seeking value in cat bonds have to move quickly if they want to secure a position at a lower cost.

Investment Week reported yesterday that Ana Armstrong, the manager of Distinction Asset Management’s £23m IM Distinction Diversified Real Return fund, has secured a 1% position for the fund by buying catastrophe bonds. The article says that Armstrong bought catastrophe bonds following a sell-off after the Japanese quake and that while historically the bonds yielded 9.5% Armstrong expects a yield of 10%-12%.

We’ve been hearing similar stories from our sources in the investment community, with one manager (who declined to be quoted) saying they saw cat bonds as a ‘great value investment’ at the current pricing. It’s encouraging for the sector to see that many in the investment community have a positive opinion on cat bonds despite the potential for some losses. This is another sign of catastrophe bonds growing acceptance as an alternative asset class which can add significant value to a diversified investment approach. Of course the sentiment since the Japanese quake hasn’t always been positive and we have heard of several investment managers who have sought to dispose of their investments in cat bonds as well. As time passes after an event of the magnitude of the Japanese quake the market will settle and the shakeout of investors will, we expect, subside.

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