{"id":18383,"date":"2018-09-11T20:15:33","date_gmt":"2018-09-11T17:15:33","guid":{"rendered":"https:\/\/bestinsurance.gr\/a1\/?p=18383"},"modified":"2018-09-11T20:15:33","modified_gmt":"2018-09-11T17:15:33","slug":"catastrophe-bonds-are-anything-but-a-disaster-brian-chappatta","status":"publish","type":"post","link":"https:\/\/bestinsurance.gr\/a1\/archives\/18383","title":{"rendered":"Catastrophe Bonds Are Anything But a Disaster: Brian Chappatta"},"content":{"rendered":"
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Catastrophe Bonds Are Anything But a Disaster: Brian Chappatta<\/h1>\n<\/div>\n
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Surging issuance protects\u00a0insurers while\u00a0investors\u00a0reap profits.<\/section>\n
By\u00a0Brian Chappatta(Bloomberg Opinion) —<\/p>\n<\/section>\n
Leave it to catastrophe bonds to be among the most well-functioning debt markets out there.Issuance of \u201ccat bonds\u201d has climbed to more than $11\u00a0billion this year, about the same as this time in 2017, when sales hit a record, according to\u00a0data compiled by Bloomberg. The debt helps protect\u00a0insurers from potentially massive costs tied to damage from hurricanes, floods or other natural disasters. That\u2019s important given that\u00a0Hurricane Florence\u00a0has strengthened into a Category 4 storm barreling toward the U.S. East Coast, with top winds reaching 130 miles (209 kilometers) an hour.<\/p>\n

Now, you might think cat-bond buyers would be panicking. After all, Florence is shaping up to be of similar strength as\u00a0Hurricane Hugo in 1989, which\u00a0came ashore near Charleston, South Carolina, and\u00a0caused\u00a0about $14.1 billion in damage when adjusted for inflation, making it the 13th costliest U.S. storm. The entire purpose of cat bonds is to\u00a0set aside proceeds to help pay future disaster claims, if needed. That\u2019s money that investors won\u2019t get back.<\/p>\n

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But that\u2019s not what\u2019s happening in this sliver of the financial markets. In fact, the bonds have gained 4.3 percent this year\u00a0as measured by the Swiss Re Cat Bond Total Return Index. They\u2019re\u00a0up a remarkable 20 percent from 12 months ago, bouncing back from the index\u2019s steepest loss on record in the wake of a\u00a0devastating month\u00a0for Atlantic hurricanes. In fact, as Bloomberg News\u2019s Michael Regan pointed out, cat bonds haven\u2019t posted a negative annual return since the index began in 2003.<\/p>\n

So issuers are well protected and investors are well compensated. What\u2019s the\u00a0catch?<\/p>\n

Certainly, a huge storm that activates\u00a0so-called trigger events on a wide swath of securities would devastate investors. And their buffer is shrinking as the market matures\u00a0\u2014\u00a0the average coupon on a cat bond issued this year is a mere 5 percent,\u00a0Bloomberg data show.\u00a0The average expected loss, according to a report from\u00a0Brendan Grady\u00a0at KeyBanc Capital Markets, is 2.71 percent. Combined, the spread is the narrowest ever.<\/p>\n

But for cat-bond investors,\u00a0it\u2019s not as simple a calculation as \u201cstorm = losses\u201d and \u201cno disaster = profit.\u201d Grady explains it like this:<\/p>\n

\u201cHurricane Harvey hit Texas and was the second costliest storm in U.S. history \u2014 however \u2014 there were no losses for catastrophe bonds other than the initial mark-to-market impact of the storm. \u2026\u00a0Part of the reason that investors are willing to take on these risks is that the bonds insure for very specific events.\u00a0A bond may only cover wind damage for a Carolina Hurricane, but not flooding.\u201d<\/p><\/blockquote>\n

This specificity\u00a0works to the advantage of all parties. For bond buyers, it reduces the likelihood that their money will be diverted away to cover claims. For insurers, it\u2019s not as if cat bonds are the\u00a0only method of insulating themselves from losses. Rather, the debt is just another way to hedge against a once-in-a-generation type of disaster.<\/p>\n

Still, the market\u2019s success has even surprised its\u00a0experts. Consider\u00a0Michael Millette, former head of structured finance at\u00a0Goldman Sachs Group Inc., who helped the bank develop a market for cat bonds in the 1990s. He said in a Bloomberg Businessweek\u00a0article\u00a0in January that the market\u00a0\u201cexceeded my expectations as far as resiliency\u201d in 2017. After a rash of hurricanes, \u201closses were consistent with the losses that investors felt should have occurred.\u201d<\/p>\n

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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 \u201csophisticated investor\u201d crowd\u00a0\u2014 pensions, endowments, family offices and hedge funds.<\/p>\n

As cat-bond sales this year have shown, supply has kept up with demand. And, according to a report from Kroll Bond Rating Agency, \u201cmany observers agree this will continue as it is expected there will be a greater need for more insurance due to climate change.\u201d<\/p>\n

According to Kroll, 2017 generated the most disaster\u00a0damage in the history of the insurance-linked securities market. And yet\u00a0it\u2019s as strong as ever. Ironically, Kroll says the decline in credit ratings on these transactions \u2014 down\u00a0to 27 percent of volume since 2013 from 75 percent previously \u2014 signals that investors are comfortable with the risks embedded in cat bonds. They simply don\u2019t need to rely on the agencies\u2019 input anymore after they have seen how this debt performs in bad times.<\/p>\n

For the superstitious, this is the time to knock on wood. Insurers and investors alike would\u00a0prefer no disasters at all, particularly one like Florence that could be in the same mold as Hugo, which\u00a0killed 49 people in the U.S. and across the Caribbean. Total return seems inconsequential when people\u2019s homes are destroyed.<\/p>\n

But the cat-bond market is specifically designed for if and when disaster strikes. And at least for now,\u00a0it seems built to last.<\/p>\n<\/section>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

Catastrophe Bonds Are Anything But a Disaster: Brian Chappatta Surging issuance protects\u00a0insurers while\u00a0investors\u00a0reap profits. By\u00a0Brian Chappatta(Bloomberg Opinion) — Leave it to catastrophe bonds to be among the most well-functioning debt markets out there.Issuance of \u201ccat bonds\u201d has climbed to more than $11\u00a0billion this year, about the same as this time in 2017, when sales hit<\/p>\n","protected":false},"author":1,"featured_media":18386,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[1],"tags":[],"class_list":["post-18383","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-1"],"jetpack_publicize_connections":[],"_links":{"self":[{"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/posts\/18383","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/comments?post=18383"}],"version-history":[{"count":1,"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/posts\/18383\/revisions"}],"predecessor-version":[{"id":18385,"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/posts\/18383\/revisions\/18385"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/media\/18386"}],"wp:attachment":[{"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/media?parent=18383"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/categories?post=18383"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/tags?post=18383"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}