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We're going to dig inside the big business stories impacting Wall Street and the global markets.
Each and every week we provide in depth research and data on some of the two thousand companies and one hundred and thirty industries our analysts cover worldorldwide.
Today, everyone to take a look at how computer tech company Oracle is showing progress and it's been to capture more of the competitive market.
Plus we'll discuss how a physics whiz made a fortune betting on nature's catastrophes.
But first, let's take a look at retail.
You got Department store of Coals reported same store sales that fell four point three percent in the fourth quarter. That represents a small improvement over the five point five percent decline during the prior quarter. It also shows, though, that Coles has struggled to attract shoppers during the holiday shopping season.
For more on this, we were joined by Mary Ross, Gilbert Bloomberg Intelligence senior equity analyst covering retail, and Mary told us she's still optimistic that Coals can boost growth.
They do have so Fora and I'm sure that so Forora carries the brands that you care about. So so Fora has been a key driver for Coals, and that's the reason why their sales aren't that bad. You know, if you look at the comp sales, they fell one percent in the quarter at the stores, So total comp sales were down four point three percent orders and consensus three percent an estimate, but digital sales were down ten percent.
And now going forward, after we get beyond the first quarter in twenty twenty four, we should see the overall comp sales do better. One with this so Fora initiative, because the comparable sales for so Fora was up twenty five percent in the fourth quarter, so we've been seeing
double digit increases there, so that will help. But there's a number of other initiatives, including the news that they're going to be putting Babies or Us shops into about two hundred stores by the fall, and that really fills a void in the market. I'm sure you're aware that. Well, what happened with Bye Bye a Baby and what about Member Toys r US that used to be a go to place when you were expecting or how you know a baby. You could go there, get your strollers, get all your products there.
We talk about what's good in their future. It sounds like it's a lot of stuff that is not cold. It's so far it's babies are us. What's the issue with the fundamental core Coals offering.
So they're revamping the merchandise because that was part of it, is just not having the right assortments. So they're redoing shoes and they're going to be bringing in sketchers. They already have Nike, they have Audi Doos, and now you're also going to see them bring in some youth brands, So they're going to bring in Quicksilver, Errol, Postall, Madden limited to in Roxy, so those are also going to
be helping on the apparel side. So with the overall revamp that they're doing on apparel, and some of their private brands are actually they resonate pretty well, like for in Babies, they have Jumping Beans that does really well. So it's really a host of a lot of things that they've done with the stores. If you go in them now, they're a lot brighter. The culture there has really been boosted. We've noticed a difference just from a year ago on how much the stores have been transformed.
So that's helping.
Yeah, that's so interesting. When I went and I was looking and you know, kids grow like weeds, right, my daughter's ninees. I was looking for pants and I was like, oh my god, they have Nike. I was like, genuinely like it. I had lots of those moments whilst walking around.
I'm gonna have to check it out.
Okay, we're listening all the good stuff here. So why did Coles give weaker than expected guides for the full year?
Part of that is because we had a new ruling that came out from the Consumer Financial Bureau saying, Okay, we're going to cap late fees on credit cards to eight dollars. So that's going to have a negative impact for department stores generally because they tend to have the
biggest exposure, and so Coles was one of them. They generate a fair amount of income from their credit card portfolio, and so they guided that that income will be down mid teams and that's about one hundred and thirty five ish million is what we're estimating the impact this year. And that's not the full year impact. But they introduced a co branded card and in twenty twenty five they hope to be able the offset the loss of income that you know they'll experience.
But we'll see.
But that's one of the reasons why you're going to see some pressure on the margin's side.
What's the consumer favorite these days? I mean, you've listed all these interesting brands turning up at Coal's, but is that enough to get the consumers through the door, or you know, can you tell us a little bit more broadly about the retail space. Are there other shops that consumers are preferring these days?
Yeah?
Well, clearly off price. And when you think about what's happening here with Coals, they're buying frequently, which is more of an off price strategy there all the buying occurs on a weekly basis. Tom Kingsbury, who's the CEO.
He is the.
One who turned Burlington Stores into the fast growing off price retailer.
That it is.
He lends a lot of credibility. So yes, you're seeing the consumer that's attracted to Coals, they also shop at off price, and off price has been a big winner for that value consumer. And then other retailers that are doing well are those that are executing and really delivering on the merchandise. And I'm speaking to apparel retailers like an Abercrombie Urban Outfitters with their anthropology and their free people brands. So it's really it's kind of a tale
of two stories. Those that are executing are delivering on results, and here we're in a transition phase at Coal's and they're hoping to be able to turn the tide of declining sales for this department store operator. And they do have one benefit. They're off the mall, not in the mall. That makes them different, so it's easier you know, to get into the parking lot, get into the store and get you know, and get out again. So it's easier access.
And like you pointed out, they have Amazon returns. It's not additive to sales, but it does bring in traffic. True, and then more importantly, so Fora has been the biggest driver.
Our Thanks to Mary Ross Gilbert Bloomberg Intelligence senior equity analyst covering retail, we.
Move now to the airline industry and Boeing. So Boeing has been dealing with the growing fallout from an early January accident that has since plunged the company into crisis, and it's also caused Boeing to reduced aircraft deliveries.
As a result.
Southwest Airlines announced this week that it plans to cut capacity this year, halt most hiring, and review its spending plants. And separately, Boeing said that it's aircraft deliveries trailed rival Airbus last month.
So let's get more on all of this.
We were joined by George Ferguson, Bloomberg Intelligence Senior Aerospace, Defense and Airlines analyst, and we asked him how challenges of Boeing will impact the US airline market going forward.
I think that, you know, the Boeing challenges will provide a little bit of firmness to the marketplace. But I still see, I think a US airline market that looks like it has plenty of capacity in it, and I still think fares are flatish to maybe going down for the year unless Boeing really curtails their deliveries for the year.
Yeah, it's interesting because if I read this issue about Boeing and I read this cut in capacity, but my first thought is going to be that that means higher prices for consumers. So what accounts for the difference there?
Well, first of all, I think the US market already had sufficient capacity last year. I think we're bouncing back from a pandemic. We saw a bunch of sort of revenge travel earlier in this bounce back, and that was very leisure driven. I don't think we're going to see as much of the leisure driven travel this year. Not that I got to pay whatever it's going to take to get down to Disney, so you'll see it.
Maybe a smaller.
Growth amount in leisure and business isn't fully back.
We know that.
So we've got twenty nineteen more than twenty nineteen levels of capacity in the marketplace, less business and maybe a little more leisure. So when I add that all up again, I kind of see a market that looks like it's got plenty of capacity. If you look at the guidance that Southwest gave on revenue per available seat mile, they lowered that at this discussion, So it tells me that the market is weaker. You know, at this guidance point, the market is weaker than they initially thought.
And at the same time, fuel prices were a little bit higher. So what it looks like.
To me is Southwest numbers are going to come in lighter than we expected in one queue. That's not a super healthy market. That's on a market that's got so much constraint that they can price whatever they want to for airline tickets and make lots of profits.
Okay, so it's a trifecta, Like they do have a specific Boeing issue and the fuel prices and then the broader softer market that's a general airline issue. United also told Boeing to stop building seven thirty seven Max.
Ten jets for the carrier. That sounds dramatic and bad. What does that actually mean?
You know, I think it sounds like Scott Kirby, the CEO of United, is just getting real about what he thinks Boeing can deliver in the near term. I guess, you know, if you sit around and you kind to hope and hope and hope they're going to get the Max ten certified, and you wait on those deliveries based on that hope, and the certification keeps getting pushed out, and it's really hard to plan. So Scott Kirby said, hey, look, stop worrying about the Dash ten. Just bring me Dashed on.
He's saying, look, I just want airplanes. Bring me airplanes. I think the market's generally going to be strong for me. He's in the premium segment too, right, which I think from the guidance we saw from Airlines, premium is holding up better.
So he wants airplanes.
He wants to go out and find some of those three twenty one larger scale from Airbus.
I think it's okay. I think Scott's being a realist.
There's a lot of challenges right now at Boeing, and it feels to me like certification.
For the Dash seven and the Dash ten.
You know, the dashten being the biggest variant of the seven thirty seven. There's just almost no way they're going to get pushed out longer than what we expect given the problems in manufacturing and Boeing right now.
And what is that?
So is there any redacross that we should start thinking about for Airbus?
Here's the challenge of this industry right the readacross is. Look, Airbus ought to be able to go get a lot more orders for its Airbus A three to twenty one. But the problem Scott has, and he's a really good customer and they're working hard to find him slots, is that they probably can't get him three twenty one's for four or five years from now. So that doesn't fix
his near term problems. And customers that would be smaller than United have an even larger problem because air Bus isn't going to work as hard to try to get them into the delivery cadence. The industry is operating at sort of max capacity now. It's pushing its supply chains to do better, but we just don't see increases of you know, build rates kind of more than ten percent
per year at best. It's really hard to bring up that supply chain, So I think the duopoly means that Airbus can't really capitalize that well on this.
If you think about what the challenges are facing Boeing, is there much of a difference to the company if we get a soft economic landing, a hard economic landing, or no landing.
Honestly, I think for all the air framers there isn't. Right.
So again, Airbus and Boeing building aircraft at rates much lower than the customers are demanding right now. You know, customers like Scott Kirby want to come in and buy a three twenty one's next three or four years, can't get them.
So I think even in.
A hard landing, soft landing, no recession environment, these folks just keep working on making the supply chain better, so the supply chain can put more of the components on the factory floor and build more aircraft.
Although I would.
Say maybe in a harder economic landing it might free up some of the labor that they need and keep some of the labor more stable at their suppliers. And that's really the challenge right here, is labor at the suppliers. Stabilizing it. You need smart people there who've been doing the process for a long time, so they do it right all the time, know the right processes and procedures.
All right, our thanks to George ferguson Bloomberg Intelligence and your Aerospace, Defense and Airlines analyst.
Coming up, we'll break down why investors were excited this week about the computer tech company Oracle.
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We moved next to e SG.
That's Environmental, Social and Governance Strategy. It's been one of the main themes over the past few years.
And you know Alex Annett thirteen billion dollars was pulled last year from US based sustainable funds due to subparer investment performance and heightened political scrutiny. That's according to analysts at morning Stars.
So we were joined this week by SEEN contractor Bloomberg Intelligence and your ESG strategists, and she took a look at ESG ETFs and we first asked her to give her outlook for the ETFs in twenty twenty four.
In the US. We expect to continue it pause now. I would say last year was the first time that flu is sterne negative. We sought about four billion in outfluce for me SG ETFs. Though I will say that I don't think that represents some kind of like mass exodus from the strategy. And I'm happy to tell you why. I just see a pause sort of less outflows but
also less inflows. If you look at the outflows, most of it were from a handful of funds, right, So in a world where you have five hundred plus funds, if one loses money, and it's really one that's all fifty percent of most outflows, it's a change in one investor sentiment. It's not like one hundred funds picking up and selling off.
Do you think though money flows more into other areas of ESG ETFs, like in Europe whose policy and I guess commitment. I mean, I say commitment because we don't really know how all the energy transition stuff will shake out in terms of allocating capital, but where it seems like it's more consistent with messaging.
One hundred percent. So Europe is still ninety nine percent of the ESGTF flows. It's about okay, yeah, it's about not the forty billion, and I mentioned US as a negative four billions, so very big divide. That being said, in terms of strategy, we are seeing a bit of a I want to call it an expansion, you know, a move to climate, to move to more of the thematics, that kind of move.
I guess could you explain that a little bit more?
Sure? So, when we think of ESG, I think of a broad sort of environmental, social, and governance strategy, all three. What I find people concentrating on more now is one of the eds or the G right, more of the themes. And I think a piece of that in the US is this push against the ESG label sort of all three combined, which is why it's you know, focusing on something simpler like gender or climate things like that.
Why do you think that in the US ESG ETFs haven't been maybe as popular as over in Europe. Is it the quality of the ETFs or is it the feelings behind ESG.
So I think it's two things. So first, they were very popular about twenty twenty two, I want to say, almost as popular as Europe, but overtook Europe a little bit in terms of growth. That being said, I think the political backlash has had quite a bit of implication on, you know, its continued growth. Also, the one challenge in the US is that growth has been very concentrated to a few investors, which means that just a handful of
investors put large chunks of money. So what we need today is we need a wide investor base, which I think is going to slow because of this backlash.
I wonder if you could talk a little bit about the sentiment there in the US, and can you, if possible, look ahead past the November election here, depending on who wins, who takes the oval office what do you think that will do to sentiment.
I think it's definitely going to be driven by who comes into office, but at the same time, also who controls some of the states right. And that being said, the way I see it is if you have like the SEC regulation and you have a number of states suing the SEC because of that, that's going to continue to have a sort of a little bit of a negative backlash.
Also, I mean, the backlash started before we even the.
Backlash right the back right. So I think the presidential cycle will have some impact. But I think the whole sort of backlash has to come down a little bit or go in some direction for this to have well some impact.
What do you make of the idea that maybe ESG doesn't actually help companies profits like.
Yeah, I mean, I can't for certain say that ESG has proven to outperform. I don't think anybody can say that unless they've done some kind of fancy quant analysis. We're starting to do that. I think we still have too limited a time history of data to actually make any kind of implication yet.
It's interesting, though, because I always understood the support for DEI and the support for ESG came in part from the new generation of consumers, for millennials who want to vote with their pocketbook, and also the diversification that's coming in the United States workforce. How does that ply into your view that the ESG back clash my fade away a bit.
So I guess I have two opinions there. So my one opinion, as we've been saying for years that this whole transfer of with is going to happen, we still see the ESG investor base as highly institutional and it's not very retail based. So in that sense, I haven't seen this transfer of money come into effect. Will that have at least not in the ESGDF food, Will that happen OVID generations and you know over to time period.
I do think so, but we haven't seen it yet, and we've been talking about it for a long time.
Our thanks to Streen contractor Bloomberg Intelligence senior ESG strategists.
All right, let's go to tech. Now, look at the computer technology company Oracle. At the beginning of the week, Oracle reported total sales in the third quarter rose over seven percent to thirteen point three billion dollars. That was roughly in line with analyst expectations.
And you know alex Oracle also said that cloud revenue jumped twenty five percent and that excited investors. On Tuesday, Oracle shares posted their biggest gain in more than two years.
So we were joined by Brody Ford, Bloomberg Technology reporter, and we asked him why the street was so excited about Oracles results.
There's been a big debate over the last year. Can Oracle transform from this kind of old school on premise, come to your office and install it on your servers kind of company to really offering cloud infrastructure the way we think about Amazon or Microsoft doing. The last couple of quarters they were disappointing and people were starting to wonder is this a flash in the pan? Is their growth sustained? They said, hey, no, we actually got billions
more on orders than you expected. They had really strong bookings growth. That's kind of reignited that enthusiasm that hey, maybe Oracle really can be that, you know, fourth hyper scaler after Google, Amazon and Microsoft.
But I guess you know, they've been having their ups and downs. Their shares got really badly hit relatively speaking, and so do you feel like the recovery today is for real or what's going to be the next waystation that investors have.
To look for?
So what's convinced them is that when you're offering cloud services, people forget the cloud isn't in the sky, it's in data centers in Virginia, and they need to build them of the day. And so Oracle said that they're going to spend ten billion dollars next year is building up these data centers. And keep in mind a couple of years back, they were spending two billion a year on capex.
Now it's ten. That's a real difference, and that's convincing investors that, hey, they are actually building out their physical infrastructure. In the AI era, everyone needs more cloud, everyone needs more of this computing power. And Oracle does seem prime to actually capture a lot of that demand. So people will be watching whether these data centers do go up in Virginia and other states.
I thought we didn't like it when companies spend a lot of money on stuff.
We like it if it's going to come back and give us something else, Right, I mean, what was that time?
So they're going to mass all this money. When do they make money off of the money they just spent.
Yeah, it seems like it'd be pretty quick because if you believe the executive's on the call, you know, executives grand stand sometimes what they say that demand outpaces supply. They've been saying this for a while that with the AI era, everyone's rushing to get more computing power. They can't provide it. So the second these data centers go live, in theory, they should be able to convert that into revenue very quickly.
Are they good at doing that quickly relative to other companies?
They are known for ruthless operational efficiency, so they should they should be good at this, right. I mean, of course the market could change, right Everything looks rosy with AI right now to be able to train their own models. Could we see a sea change? Hard to say, but yesterday they got eighty billion in bookings. Once you book you can't get out of it, so it's for a while.
So I also find it's interesting if we're going to see cloud computing and AI be a cyclical industry or not.
Like, clearly it's a structural shift.
But will we see a ton of data centers come on at the same time, like from different companies, and then their core prices go down so the revenue isn't as hot, Like will it be cyclical like chips are.
For example, or not?
It's a good question. There's one rule of software compared to hardware that software is a lot stickier, right, I mean, you buy chips, you have them, you don't need to buy more. Once you start giving money to software providers, you plan on x amount of come. You know, computational power that usually doesn't go down. I mean, is there a point where the growth will level off? Probably? I struggle to see it, being like hardware, where hey, everybody
bought computers this year. Now the computer makers are sol because nobody wants to buy anymore.
And then it's all they've got you on the subscriptions, basically like what we all have at home. But now, can you talk a little bit more about how Oracle is benefiting from AI?
Yeah?
Well, and that's the big question for a lot of software makers. Every software maker when they have positive results, they say in their commentary, this is due to aid anything. They call their new cloud version the Gen two AI. Is everybody using it for AI?
No?
But what we though is that AI requires a ton of computing power, and Oracle has marketed there specifically for being good at training AI models, and so there's reason to believe that folks are upping their demand due to AI needs. But is this more than a couple of percentage point difference. Most analysts don't think so at this point.
So it's still the cloud. It's still it's the cloud, the data centers building all that out.
Yeah, you know, I think about you know, any companies running all these you know, records, the terminal or anything like that. Just it's more that kind of tradition stuff at this point than it is training models, though that's probably part of it.
I did want to point out too that maybe you can comment on this one, that Bank America, the reason why they upgrade their earnings, in part was because of an investment cycle from big tech Microsoft, Amazon, Google, Meta spending one hundred and eighty billion dollars in cap x. They're in that reinvestment cycle, and I'm assuming you guys like Oracle are going to be beneficiaries.
Is that a link I can make?
I think it is probably more that they're all riding similar trends, you know, Amazon, Microsoft, They've spoken also in recent quarters that their customers are really focus on cutting costs. That for the most part, everybody had transported a bunch of things to the cloud and then they wanted to cut costs, and that behavior was starting to change, you know, the twenty twenty four budgets got approved, they started feeling
good again, and the investment was going up. And so I think it's one that they're all riding a similar wave.
I see.
You know.
Let me ask you something internally about Oracle. Who's running the company. Is it Larry Ellison?
It's crazy, right because you think about somebody like a Bill Gates that's the same generation. He hasn't been there for a decade or more. But yeah, Larry's still running that. I mean, he's his title is not CEO, but he's chairman and his CTO. He's, you know, on the earnings call, talking back and forth with analysts. For someone of his age and his generation, it's rare to see him still running the company. But he continues to and there's no
reason to believe that will change anytime soon. So it's interesting.
All right, Thanks Berdy Berdi Ford, Bloomberg Technology reporter.
Coming up on the program, A look at It, Predicting nature's catastrophes could become more profitable.
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The move next to politics.
Earlier this week, Donald Trump clinched the Republican presidential nomination and this sets up an election rematch in November with current President Joe Biden, who secured the Democratic nomination.
For more, we were joined by Nathan Dean, senior policy analyst at Bloomberg Intelligence. Nathan gave us his take on and how investors should start to prepare for the election cycle and what sectors may have more at stake.
What this race is essentially coming down to three things. It's President buy and versus President Trump versus not voting. But from an investor's standpoint, the way we're advising our clients right now is start with the geopolitical the macro views, because that's where the power of the presidency is a little bit more powerful. And so you see statements like
President Trump saying fifty percent tariffs on China. Well, we've been doing a lot of work with our FX strategists on what does that do for the euro dollar?
What does that do for the dollar?
And Bloomberg Economics has put out some great pieces as well on what that actually could be on the economy. And so the second thing to keep in mind is executive actions. What would a president do on day one? You know, for President Biden, I think it's just par for the course, go back to his State of the Union, go back to the budget, and you'll get a little
bit idea of his priorities there. But when it comes to President Trump on day one, you'll see a lot of executive actions which are directed agencies within the executive branch to go out and start regulatory changes. And that's the third aspect for it is regulatory change. Now, regulatory change takes a lot of time, and so from an
investor standpoint, it's something to keep in mind of. But those geopolitical factors of trade and tariffs and national security should be at the forefront of any investor trying to figure out how does the election apply to them in their portfolio.
So let's dig.
Into this a little bit. Do you have any in mind, any sectors in particular that could really have more at stake in the presidential election outcome?
Absolutely, it's energy, energy and energy. And so the reason why I say that is there's this thing called the Inflation Reduction Act. President Biden signed this to the law back in twenty twenty two. A lot of investors, especially non US investors, are taking the approach that because it's law, it's going to be law for the get go. But in the IRA, there are a lot of tax cares, if you will, incentives and grants and so forth to
spur clean energy and clean energy initiatives. It's about seventy five percent of the investment of the IRA is geared towards these tax incentives. Now, if President Trump wins on day one, he can put forth one of these executive orders directing the Department of Treasury or to the Irs to essentially just stop, stop work, stop these incentives and
so forth. There's some legalities that they have to work through here, but effectively they will be able to use a scalpel instead of a sledgehammer to start cutting away a lot of those clean energy inities.
I mean, you're talking my language here.
I mean a lot of oil companies that I talked to like the IRA because they're getting subsidies, particularly if they're dealing in carbon capture. Some yl companies are also dabbling a little bit in hydrogen. I mean this bill helped they like it. It helps them.
Yeah, absolutely, But that's one of the disconnects you often hear about New York versus Washington, because in the Washington sense, there was a bill earlier this year in which the Republicans put forward essentially said we'll get the entire thing,
and so the messaging is different. And you know, the reason why we think and our analysis is out on the terminal, we don't think that there's going to be that much change to the IRA other than specifically some of these EV related tax credits, is because a lot of the money and a lot of the infrastructure that's being built in the United States are going to red states, and so you often see statements from Republicans saying I supported this initiative and even President Biden in a State
of the Union address last week said, look, if you don't want the money or you want to take credit for it, I'll certainly take the money and take credit for it. So I think there's this disconnect between what's happening in Washington and the markets. I expect that the coalesce if President Trump wins, as the markets and especially Wall Street investors have become to try and get in to his inner ear and so forth, so to speak.
But certainly headline risk and you will see headlines associated with that going up into the election.
Our thanks to Nathan Dean, senior policy analyst at Bloomberg Intelligence.
On this program, we often look at our favorite Bloomberg Big Take stories of the week and you can read them on the Bloomberg at Bloomberg dot com slash Big Take, and this week we looked at the story of how a physics whiz made a fortune betting on nature's catastrophes.
It delved into why predicting nature's catastrophes is in fact a big business. We were joined by the stories author Gatam Nike. He's a Bloomberg senior editor covering ESG investing. We first asked Gaton for more background on what this story means.
It has to do with insurance. So traditional insurance and reinsurance, you know, do a fairly good job of covering modest and medium sized catastrophes, you know, storms and hurricanes and earthquakes. But every thirty fifty one hundred years you get a Hurricane Katrina like event which is completely devastating in its scope. And that's a kind of event that traditional insurance company can't really handle. So they've turned to a new type
of asset class. Well it's not new, it's have been around for twenty five years, but it's really coming into its own more and more now, and it's called catastrophe bonds. And the way it works is that instead of the insurance company taking the risk should disaster happen, that risk has passed on to Wall Street investors. So if the disaster does happen, the Wall Street investors can lose some or all of their money. So it's a pretty risky move.
But if it doesn't happen, and these bonds are only they run for only three to five years, not for much longer. If the disaster doesn't occur, then the investigates to keep its original capital plus gets a hefty return on top of that for taking that risk.
So your story, it's fascinating and there's stuffing to dig into there. But you start off taking a look at Formatt Capital Management, and this is the owner of the
world's biggest collection of catastrophe bonds. Can you talk a little bit about their strategy and in particular, you know, I just want to circle back to a comment that you may just now that in this current environment, this market is very, very interesting, and I wonder if you could talk about how a warming planet is figuring into for Met's strategy.
Sure, so, you know there are always hurricanes and earthquakes, but the problem is that more and more people are moving to Florida and California and other parts of coastal regions in the world where you know, they want to have a nice view and a nice seaside experience. But those expensive homes are building. When they get hit by a storm, they you know, tend to lose a lot
of money. So that is the real problem, is that human beings are moving to these risky areas, and the insurance industries either in some places like California, in Florida walking away from it. They're not going to ensure people the risks are too high, or they're turning to kind of instruments like a catastrophe bond to do so. So firmat Capital is the world's biggest cat bond investor. Their assets are about ten billion dollars and they have a
very interesting strategy. So, like other cat bond investors, they do buy these risk models which help you to predict the likelihood of a hurricane occurring in a particular year or over two three years. But what they do is they add a magic source. Because the co founder of this firm, John So, has a physics background, has a
biophysics degree from Harvard. He's been able to layer an extra in a sophistication in trying to predict the likelihood of risk and return for each of these potential catastrophes. So his buying approach is quite clever and sophisticated and he hopes to get an edge from that. So that's where Fermat has really you know, they've been involved in this market almost inception, and they use this extra edge to try and beat the market and other catbon investors.
And has it worked. What are their returns like.
Yeah, so they returns last year, which is a very good year for all investors, about twenty percent, and I think a lot of other investors also came in at that level. I should say that the interesting thing about cat bonds, it's a really good diversifier. So you know, unlike your regular you know, stocks of bonds that fluctuate with market movements or the Federal Reserve decisions, a catastrophe bonds outcome is down to mother nature. Either she's kind
or she's unkind. And if you diversify a portfolio with cat bonds and you know, you get the benefits of that, it's a really good diversitifier that has no correlation with the rest of the financial markets.
Can you talk a little bit about how the current environment and the insurance market it is affecting for met's returns, because you know, you make the point in the story that a lot of insurers are charging more to protect customers from devastating weather.
Well, you know, last year was a record year for the issuance of catastrophe bonds, and this year is looking likely it's going to be again a pretty solid year, and that reflects the insurance industry's desperate need to pass on some of this risk beyond the traditional reinsurance industry to Wall Street. Wall Street is a huge, you know, deep pocket with trillions of dollars at its disposal, a lot of you know, risk taking investors, unlike traditional insurance,
which is a lot more conservative. So as you can see from just the number of new issuances that are lined up for twenty twenty four that insurers are increasingly
turning to this market. So one of the issues a problem is that secondary perils, as the industry likes to call it so flood, wildfires, and thunderstorms are causing more and more insurance damage as opposed to you know, a hurricane Ian, a Hurricane Katrina like event, and insurers are trying to figure out how can they protect their own portfolios, their own balance sheets, but also provide insurance to people when you have more of these type of events occurring,
this sort of medium size five ten billion dollar disasters versus you know, the one sort a thirty year event, and at the same time try to make sure that you know their balance sheet is protected. That's not so easy to do because we don't have much data on these kind of secondary perils. And also the models that are used that give an investor some certainty that okay, they don't stand to lose. You know, typically rare hurricane the loss estimate is somewhere in the region of two percent.
It's fairly low. The return you can get is something like eight nine percent. So as long as that clarity isn't there for these tornadoes, thunderstorms, ice storms that you see in Texas, as long as that's happening, the insurance industry is going to find it difficult to access the camp bond market to cover those kind of perils which are becoming more common.
Gotam, what are the main risk events that now a CEO is modeling that may or may not happen, like because he basically has a model what he thinks will happen and then either take a little bit more risk but for more reward, or avoid that altogether. But what are the things you're seeing right now?
Well, you know, they own something like two hundred and fifty or two hundred and eighty individual catastrophe bonds and the whole market maybe has three hundred and twenty or so. These are rough figures, so they are very dominant. They own a vast swath of this whole market. You know, that could include a tsunami campbond for Japan, or typhoon camp bond for the Philippines, a hurricane cat bond for Mexico,
all kinds of different events. So I think their modeling is primarily focused still on the big potential disasters such as hurricanes or an earthquake in California or wildfires in California, and less so on things like thunderstorms, because again they don't really have the data or the sophisticated models yet, but they're building up that because that's where the catastrophe
bond market is going to grow. It's going to move away from the kind of Hurricane Katrina like events, the rare of big disaster events, and more to you know, Hurricane Sandy like event, which you know there is a catbond for. You know, the New York Subway system has acquired one hundred million catbord. I think they've renewed perhaps the third time now to protect the subways from going underwater should a Hurricane Sandy like event hit the city.
Head on our thanks to Gatin Nike. He's a Bloomberg senior editor covering ESG Investing.
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