If 2006 is a quiet year for hurricanes, Greg Hagood stands to make a ton of money. But if more Katrina-size storms rip into the U.S., he and the investors in the hedge fund group he co-manages, Bermuda-based Nephila Capital Ltd., could get their shingles blown off.
That’s a gamble Hagood and other hedge-fund managers are happy to make. Awash in capital, hedge funds hope to cash in on catastrophe insurance, whose price has zoomed since Katrina wreaked $38 billion in insured losses. They don’t sell policies to companies or homeowners. Instead, they absorb some of the risk of future megadisasters from shell-shocked insurers.
The infusion of money from hedge funds, as well as from other sources, is helping to keep catastrophe coverage available, while preventing rates — which in some cases have more than doubled — from going even higher. By contrast, after Hurricane Andrew devastated a chunk of South Florida in 1992, fresh capital was scarce at first, sending commercial rates soaring and putting pressure on the homeowner market. Some household insurers even pulled out of Florida after the state blocked them from raising rates sufficiently.
This time, hedge funds are changing the dynamics. True, they still account for a relatively small fraction of total catastrophe protection; estimates range from 1% to around 10%. And hedge funds supplied less than half of the $9 billion raised by reinsurers since Sept. 1. Nephila, for instance, has just a dozen employees. (It’s named after the genus of a spider that, according to Bermudian folklore, can sense approaching hurricanes.)
