Bonds flattened by Irma

THE traditional way that the financial world looks upon natural disasters is to express sympathy for those affected, tot up the likely insurance bill and assess the likely impact on output and growth.

Hurricanes Harvey and Irma have thrown up a new financial wrinkle in the shape of ‘cat bonds’.

These are nothing to do with the feline population but are high-yielding securities issued by insurers and other financial groups and are designed to pass the risk of catastrophe, or ‘cat’, onto a broader range of investors.

Cat bonds could unkindly be compared to the toxic securities, built on sub-prime mortgages, which ushered in the financial crisis of a decade ago.

as was the case with infamous Cdos, or collateralised debt obligations, the attraction of cat bonds has been high interest rate returns in an era of historically low rates.

Investors have been pouring cash into the bonds with the average coupon or yield on the bond 4.4 times the expected losses.

But as their popularity has grown so the yields have shrunk to less than half the returns seen five years ago.

When investors put money into cat bonds the issuers hold the cash in high quality assets, such as US Treasury bills, and the money can be reclaimed by the issuers when a catastrophe hits. Fund manager artemis estimates that some $14bn (£11bn) are being put at risk so far by this year’s atlantic hurricane season.

That may be small beer compared to the estimated £50bn of total insurance exposures to the storms which have battered the Caribbean and america’s Southern states. But it could do significant damage.

The price of cat bonds has plummeted to 50-60 cents in the dollar since the hurricanes hit needless to say lifting the coupons.

What is unknown is who precisely holds the cat bonds. are they concentrated in any one or two institutions or spread around like cluster bombs ready to explode in the most unexpected ways? The Swiss Re index, which tracks cat bond prices, has suffered the biggest drop since 2002 after Irma struck last week. The scale of the cat bond market may not be enough to trigger the huge disruption we saw a decade ago. But that it exists at all, a form of reinsurance totally divorced from the expertise of the industry, shows the capacity of finance to find ever more creative ways to gamble on risk.

Cat bonds are not the only dark corner of finance to be exposed by Irma. at the very moment Theresa may’s government is taking flak for the perceived poor response to the flattening of the British Virgin Islands and the unfolding human tragedy.

The BVI has declared its Financial Services Commission is up and running. The regulatory authority is ready to provide services such as corporate registry.

as the Panama Papers made clear, the BVI historically was a favourite destination for shell companies used by money launderers and tax avoiders.

amid tragedy and devastation, the wheels of commerce turn.

Astra advance

ASTRAZENECA needed some better test results after the reported indifferent outcome of its mystic trial for immunology cancer treatment which wiped £11bn of the shares in July.

The pharma group was not helped at the time by reports that chief executive Pascal Soriot, the hero of astra’s 2014 defence against Pfizer, had reportedly been tapped up by Israeli generics producer Teva.

now that Teva has recruited Kare Schultz from danish drugs firm lundbeck, we must assume Soriot is safe for the time being.

astra shares are up strongly for the second session in a row following results showing its immunology treatment Imfinzi works well with lung cancer patients when the disease has not spread.

Survival rates increased by 16.8 months in what has been described as an ‘absolutely amazing’ result. The treatment could be worth up to £1.5bn a year.

another study also shows good results for another lung cancer medicine Tagrisso in a market that is estimated at £3bn plus a year. Stock markets like instant results. But they should have learned by now that bringing a new family of immunology drugs, which help the body fight cancer, requires testing and patience.

Challenger bank

oPEnInG on a British website near you soon, the Goldman Sachs retail bank marcus. The squid has grown a new tentacle.