Investor Appetite for Catastrophe Bonds Still Strong

Investors’ renewed interest in so-called catastrophe (cat) bonds, which shift insurance risk onto investors and can be completely wiped out by a natural disaster such as an earthquake, shows no sign of abating.

According to deal tracker Artemis, sales have now exceeded US$6bn so far this year and are set to be the highest since 2007; evidence that debt holders are seeking increasingly novel ways to boost returns while yields generally remain low.

The total amount of catastrophe bonds outstanding globally is currently close to US$20bn, according to Artemis. Paul Traynor, head of insurance at Bank of New York Mellon (BoNY Mellon) predicts that the figure could quadruple over the next 10 years.

Earlier this week French insurer Axa raised €350m in the biggest issue to date of euro-denominated cat bonds, which will be used by the group in providing insurance cover against severe European windstorms – an event that has a probability of occurring once every 100 years, according to BNP Paribas, a bookrunner on the deal.

Cat bonds’ attraction for investors is threefold. First, they offer strong returns when compared with other fixed-income asset classes. From the start of 2013 through the end of September, total returns on catastrophe bonds were almost 9.5%, according to reinsurance group Swiss Re. Against this investment grade corporate bonds issued in euros managed returns of only 1.3% over the same period, according to Markit.

Secondly, the bonds typically have floating rate interest payments, thus offering some protection against rising benchmark interest rates. Thirdly, unlike other bonds, their performance is largely independent of wider financial-market forces.

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