These bonds offer high yields for taking on hurricane and other disaster risks


The soaring costs associated with extreme weather conditions offer investors the opportunity to earn yields of up to 13%. Hurricane Lee is the latest of what is expected to an above-normal season for hurricanes this year. As of September 11, the National Oceanic and Atmospheric Administration reported that the U.S. had already experienced 23 confirmed climate and weather disasters with losses in excess of $1 billion. Insurance companies sell catastrophe bonds to help pay for the damages caused by extreme weather events. Since 1997, they have gained in popularity despite a few bumps. These investments also offer juicy returns. Cory Anger is the managing director of GC Securities. This is the capital markets and Insurance-Linked Securities arm of reinsurance broker Guy Carpenter. The yield or spread on these securities are about 8.33%. She explained that investors can earn an extra yield if they reinvest their money into high-quality securities such as U.S. Treasury Money Market Funds or AAA-rated Securities from development banks like the World Bank. She said that the average return for investors on these securities is a little more than 5%, plus an average spread of 8.33% on bonds. “You get healthy yields for taking on this risk.” Investors include hedge funds, pension funds and asset managers, as well as high-net worth individuals. Retail investors can purchase A shares in the Pioneer Cat Bond Fund. Artemis Deal Directory, which tracks insurance-linked securities and cat bonds, predicts a record year. According to Artemis Deal Directory, $9.7 billion worth of cat bonds will be issued in 2023’s first half, $1.9 billion more than last year. This is $3.2 billion more than the average for the last 10 years. Artemis reports that as of Friday, the year-to-date total has surpassed $10 billion. Anger stated that based on the outlook for the remainder of the year, it could be the highest issuance ever. She believes that there are currently just over 38 billion dollars in cat bonds outstanding, but she expects this to reach over 40 billion dollars by the end the year. Cat Bonds Work Cat bonds are designed to pay out when an issuer is faced with a disaster risk. This point of attachment is what the bonds refer to. It could be $825 million of losses from a storm. Anger explained that investors may lose all or part of their principal if the trigger is activated. She explained that “it’s designed as layers within the possible losses the company could suffer.” Steve Evans, Artemis’ owner and editor-in-chief, explained that losses are experienced from the bottom up, and that cat bonds are “quite high” up in this tower. He said that the investment opportunity was really good right now, because there is a lower level of risk and a higher return. “Risk adjusted returns are significantly higher than they were five or six year ago.” The average duration of the bonds is three years. The bonds can be based upon a single or multiple events that occur over time. Cat bonds are a good investment for retail investors. While most cat bonds are aimed at institutional investors, Amundi’s Pioneer Cat Bond Fund offers A shares to retail investors. The mutual fund invests at least 80 percent of its assets in cat bonds. It was launched in January, and the initial investment is $1,000. Morningstar reports that the fund has assets of $75.2 million and an expense rate of 1.75 percent. The fund’s return since its inception on Jan. 27, 2009, is 9%. Its initial performance was encouraging. Morningstar’s Research Team wrote that it was too early to draw any conclusions based on the performance of the fund with its short history.