Woodford-backed insurer among opportunities from hurricane fallout

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Investors are finding opportunities in insurers and catastrophe bonds with a Woodford-backed stock among those taking a hit from high profile hurricanes in the US and Caribbean.

Hurricanes Irma and Harvey are expected to cost insurers up to $70bn and contribute to one of the worst years for natural disasters. The Swiss Re catastrophe bond price return index fell 16 per cent last week in the midst of Hurricane Irma sweeping the Caribbean.

However, earlier estimates had placed the cost of Hurricane Irma alone at $150bn.

SYZ Asset Management portfolio manager Mike Clements researched UK insurer Lancashire Holdings on the disaster, but ultimately decided it was still too expensive despite stock price falls.

“From an investment perspective this is a classic example of the market reacting to sentiment, which is bad, and actually when you look at the companies this is actually a short-term hit and a long-term benefit,” Clements says, pointing out premiums will now rise.

The Woodford-backed stock rallied 10 per cent in one day as Hurricane Irma was downgraded to a tropical storm.

Artemis Monthly Distribution fund manager James Foster says the hurricanes are a “very good signal to buy more” and he has upped exposure to junior insurance company bonds, which he is already positive on.

“I’m not worried at all. That’s what they do, they manage those types of risks and short term it might hit their probability, but if it gets really disastrous shareholders have to wear the pain, not bondholders.”

Foster says premiums will go up in response to the hurricanes. “They stay unchanged until the next big disaster and then everyone will be prepared to pay that higher rate because their house has been knocked down or they’ve seen their neighbour’s house knocked down.”

Architas has around 2 per cent allocated to the CATCo Reinsurance Opportunities fund in its Multi-Asset Active funds, run by Nathan Sweeney, and 3 per cent in the Diversified Real Assets fund, which is run by Solomon Nevins.

The catastrophe bond fund has fallen 18.6 per cent in the last month and 3.9 per cent over the last year, FE data shows.

Sweeney says he isn’t surprised by significant falls in CATCo shares in the lead up to the recent natural disasters, given the potential impacts on the insurance industry and the fund.

“The CATCo fund itself is well diversified offering exposure to more than 30 underlying risks across the globe from earthquakes in Indonesia Japan to windstorms in Hong Kong,” Sweeney says. “However, windstorm damage in the US is one those events that can have the single biggest impact on losses in the fund so Irma and Harvey are not to be underestimated.”

Architas maintains its exposure and continues to back the long-term benefits of in terms of potential returns, income and diversification, Sweeney says.

The net return on invested capital assuming no losses was around 16 per cent in 2017, so the impact would have to be significant to deliver a negative return.

“Given the drop in share price, and the potential impact of these hurricanes being lower, we will be constantly reviewing to see if there is an opportunity to increase our holdings,” Sweeney says.

He adds that, like others, they will be assessing whether extreme weather events will be likely to become more frequent due to climate change, but that premiums in the reinsurance market will likely rise in response to the most recent events making next year’s potential returns more attractive.