The other upside for buyers is that these bonds have little to do with the overall economy and business cycle. That makes them a strong candidate for diversification among the typical “sophisticated investor” crowd — pensions, endowments, family offices and hedge funds.
As cat-bond sales this year have shown, supply has kept up with demand. And, according to a report from Kroll Bond Rating Agency, “many observers agree this will continue as it is expected there will be a greater need for more insurance due to climate change.”
According to Kroll, 2017 generated the most disaster damage in the history of the insurance-linked securities market. And yet it’s as strong as ever. Ironically, Kroll says the decline in credit ratings on these transactions — down to 27 percent of volume since 2013 from 75 percent previously — signals that investors are comfortable with the risks embedded in cat bonds. They simply don’t need to rely on the agencies’ input anymore after they have seen how this debt performs in bad times.
For the superstitious, this is the time to knock on wood. Insurers and investors alike would prefer no disasters at all, particularly one like Florence that could be in the same mold as Hugo, which killed 49 people in the U.S. and across the Caribbean. Total return seems inconsequential when people’s homes are destroyed.
But the cat-bond market is specifically designed for if and when disaster strikes. And at least for now, it seems built to last.
This article provided by Bloomberg View.