Cat bonds starting to attract this type of investor

Catastrophe bonds are gaining a reputation as a socially responsible investment, a CatIQ Connect speaker said Wednesday.

“Investors seeking investments in the [environmental, social and governance] market are starting to classify cat bonds as a responsible investment,” said Alyson Slater, senior director of sustainable finance at the Toronto-based Global Risk Institute.

With ESG, investors take environmental, social and governance factors into account, in addition to financial factors, when deciding where to put their money, said index and decision support provider MSCI Inc.

A cat bond normally provides coverage to an insurer for a specific disaster — such as a named windstorm in the United States, a Canadian earthquake or a European windstorm — over a specific period of time. If the disaster never happens, the investors get their money back plus interest. If the disaster does happen, investors could lose some or all of their money, depending on the attachment point and how much the disaster cost the insurer.

Investors could earn 2.75% to 16%, depending on the bond, Aon said in a report this past summer.

By issuing cat bonds, insurers can transfer large losses to investors, Slater said on Oct. 14 during the session Risks and Opportunities for the Capital Markets, part of a virtual webinar hosted by CatIQ.

“In a low interest [rate] environment, cat bonds can provide a higher yield investment alternative. They provide diversification against economic and market risk,” Slater said during the panel, part of Financial Sector on Catastrophes & Climate Change, one of the CatIQ Connect series of quarterly talks.

The inflow of money into the “ESG market,” since the onset of the COVID-19 pandemic, “have been stunning,” Slater reported.

“There are new investors looking for products that have a good track record — and some of these have been around a decade — that they can add to their portfolio. It is interesting to see how cat bonds have been picked up by [the ESG] space.”

The moderator was independent consultant Andrew Castaldi, who described what he heard when talking to prospective panellists.

“The people that are putting money behind these bonds or [insurance linked securities] programs, are very very interested in climate change. They are very concerned about the environmental, the social responsibility and the governance that their counter-parties are doing as far as climate change goes. They want responsible partners,” he said.

Aon reported earlier that as of June 30, 2019, the amount of alternative capital in the re-insurance sector stood at US$93 billion, up from less than US$30 billion in 2008. ILS includes not only cat bonds but also sidecars, collateralized reinsurance and industry loss warranties.

Cat bonds can be very profitable for investors, who include hedge funds, pension funds, endowments, film stars and athletes, said Philip Cook, chairman of Omega Insurance Holdings Inc. during the 2014 annual Industry Trends breakfast in Toronto.

At the time, Cook reported some cat bond funds had annual rates of return as high as 17% and 18% but they still posed a risk for investors.

Feature image via iStock.com/Pogonici