Eye of the Storm
Gerelyn is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With Hurricane Isaac wreaking havoc over the Gulf of Mexico, residents heeded evacuation orders while television reporters compellingly positioned themselves most directly in the center of the storm's path. Thrill-seeking investors can be like the media in their willingness to take risky bets that offer no promise but the potential of reward. Like reporters, investors can position themselves in the eye of storm Isaac - if not physically than at least metaphorically. There are some investment opportunities on the debt and equity side that could eventually pay off generously.
Cat bonds, which are issued by insurance companies and designed so investors shoulder some risk for catastrophic events in exchange for distributions, are certainly one strategy. While the allure of cat bonds lies in the promise of a lack of catastrophe, active hurricanes certainly bring these securities to the forefront for better or for worse. There is nearly $15 billion worth of outstanding cat bonds in the markets, according to the FT.
Issuance of these fixed-income securities has escalated to near record-setting levels at some $3.6 billion in the first two quarters of 2012. Demand is so robust that there is also a secondary market for cat bonds. In April, Floridian insurer Citizen's Property Insurance Corp lifted its cat bond target amount three-fold to $750 million, which represented the largest ever cat-bond issuance and which was handled by Goldman Sachs. Investors are largely institutional but likely included pension funds.
Insurer Allstate (NYSE: ALL) was burned by cat bonds in 2009 amid the Lehman bankruptcy. Since that time, however, and in the past three years in particular, the stock has been breaking out. Just this month Allstate touched a 3-year high. It's currently trading at about 20% above of its 200-day moving average, and historically has pulled back after this point. Therefore Allstate may not represent the best buying opportunity at current levels, according to Enis Taner at RiskReversal.com. If Hurricane Isaac proves to be disastrous, it could benefit Allstate's car insurance business. In a higher-priced environment, drivers would likely take to the road less frequently, which means fewer accidents and claims, noted Meyer Shields of Stifel Nicolaus on CNBC.
Travelers (NYSE: TRV) similarly touched on a new high recently but with little conviction. Trading at nearly $65, the stock may present a better buying opportunity in the low $60 range, Taner said.
Generally speaking, in lieu of some devastating event, cat-bond investors can expect to generate returns that are as much as 10% higher than LIBOR, according to the FT. Using the Swiss Re Cat Bond Total Return index as a benchmark, cat-bond investors between the 12-month period beginning in June 2011 earned returns of more than 7%, according to a June article in the Wall Street Journal, which tops the performance of traditional corporate bonds.
John Brynjolfsson, CIO at Armored Wolf, a hedge fund with some $735 million in AUM, characterized returns on cat bonds as 'normal' and 'attractive' in light of performance in the broader financial markets to Bloomberg.
Of course, the more severe the hurricane season, the less the payouts will be for investors. For instance, in 2011, when Japan faced its horrific earthquake and subsequent nuclear plant explosion, it sent cat bonds reeling to the tune of 1.53% returns in 2011.
But thus far, Hurricane Isaac has not produced the kind of wreckage that sends the financial markets in a tailspin and no real surge in energy prices is anticipated. Oil prices are alarmingly trending lower amid drilling facilities that - while largely evacuated - have been largely untouched by Isaac. Oil drilling stocks such as Oklahoma City-based Gulfport Energy (NASDAQ: GPOR) have begun abandoning their rigs but investors have not jumped ship. The stock is trading at about $26 per share, which is up about 25% month-to-date but still below the 52-week high of $37.80.
Theoretically, hurricane Isaac could be a shot in the arm for gasoline prices, but like oil gas has been moving down. Nevertheless, nearly 50% of natural gas production in the Gulf has been halted, according to CNBC. And Port Fourchon, which is a major hub for the petroleum market located in the southern-most tip of Louisiana and which services the majority of the deep-water oil production in the Gulf, remains vulnerable to the storm, said John Hofmeister, former head of Shell oil and currently of Citizens for Affordable Energy speaking on the business network. This is the very same port that nearly came to a halt on the heels of the BP oil spill.
Where investors might need to turn to uncover opportunities from Isaac is to history. The S&P 500 index actually advanced 6% in the six-months following Hurricane Katrina in 2005, as illustrated by data compiled by S&P strategist Sam Stovall. In the previous year, when Hurricane Charley hit, the S&P gained 12% in the six months after the storm. In 2008 after Hurricane Ike struck, the markets as represented in the S&P lost nearly half their value, but that was also when the broader economic collapse began to surface.
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