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Bets on the weather could be a wash for Sandy

By   /   October 31, 2012  /   No Comments

HURRICANE SANDY brought winds and rain to the East Coast at the end of October, here, a street in Marblehead, Mass., is flooded from Hurricane Sandy. Pennsylvania’s school employees’ retirement fund has an investment in a hedge fund betting against a natural disaster on the East Coast.

By Melissa Daniels | PA Independent

HARRISBURG — One of Pennsylvania’s pension funds hedged against the likelihood of a natural disaster on the East Coast, such as Hurricane Sandy.

But it’s too soon to tell how those publicly funded investments will fare.

Earlier this year, PSERS invested $250 million in a portfolio with Nephila Capital. That portfolio covers a range of securities related to reinsurance and weather risk, meant to back insurance companies in the event of a natural disaster.

The highest exposure in that investment involves a southeast hurricane, a northeast hurricane or a California earthquake.

It’s not certain if PSERS’ investment in the reinsurance market, including in a relatively obscure asset known as catastrophe bonds, will result in more pension debt in connection with Sandy’s destruction. That depends on several factors, such as the total cost of damage, how that gets covered, and the specific terms of the PSERS investment in relation to where Hurricane Sandy hit.

Such is the nature of dealing with the weather and securities.

Evelyn Tatkovski, PSERS press secretary, said early indications are that the fund’s reinvestment investments did not incur material losses. That’s partially because the investments are global, taking interest in natural disasters worldwide, not just the U.S., she said.

“Given the geographic diversity of PSERS’ reinsurance investments, this storm’s losses may only impact a small portion of the total reinsurance portfolio,” Tatkovski told PA Independent, “but again it is too soon to tell what the exact impact may be until the actual losses, including the type of losses (i.e. wind, flood, etc.) are determined.”

As of September 2012, the Public School Employees Retirement System has invested $375 million in the reinsurance market, less than one percent of the fund’s total assets. Performance is above 7 percent.

Tatkovski said reinsurance typically covers wind damage, and not flooding, which is typically backed federally. Because of that, a storm like Sandy may not end in a loss for the investors.

“For example, if a hurricane comes ashore as a Category 1, causes minimal wind damage but causes significant flooding damage, reinsurance funds generally don’t reinsure these risks and therefore may have no exposure,” Tatkovski said.

Nephila, where PSERS invested this summer, is a Bermuda-based investment manager that specializes in reinsurance securities. One form of that is a catastrophe bond, or cat bond, a type of security that reimburses insurers after they incur major losses in a natural disaster.

The objective is to maintain a “geographically diversified portfolio of remote catastrophe risk (low expected loss, high industry loss).” According to a presentation from Nephila, the fund has a target net return of 8 percent to 10 percent over time, and 10 to 12.5 percent in the first year.

The portfolio had $387 million in assets under management before Pennsylvania invested, according to the presentation.

Despite the obscurity, cat bonds are attractive to investors in the sense that risks and returns aren’t connected to the volatility of the rest of the financial marketplace.

Instead, risks are connected to Mother Nature.

Nephila’s managing director, Barney Schauble, sat down with OpalesqueTV, an online news service dedicated to covering the alternative investment sector, in an interview released earlier this year. In that interview, Schauble said investors often consider their weather-related investments as a separate asset class, because they are not directly attached to traditional markets.

That reaffirms the importance of something like this in an investor’s portfolio, he said.

“Larger market moves in financial markets, positive or negative, won’t spill over directly in this area, and that was certainly proven for our investments in 2008 or 2009,” Schauble said.

Rick Dreyfuss, a senior fellow with free-market think tank Commonwealth Foundation, said most public pension funds are diversifying their portfolios with different types of asset classes.

But he questioned the stability of the weather-related investments, and the losses the state could experience if a catastrophe occurs.

“I would like to think that there is another way to achieve the same diversification objectives through other means that would provide, in my opinion, less risk,” Dreyfuss said.


Melissa formerly served as staff reporter for Watchdog.org.