Diversification options: Profit with CAT bonds: Are catastrophe bonds also interesting for private investors? | message
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• Catastrophe bonds offer a diversification opportunity
• The track record of CAT bonds is impressive
• Total loss is possible at any time
By issuing CAT bonds, also known as catastrophe bonds or catastrophe bonds, insurance and reinsurance companies pass on to the capital market extraordinary risks that can arise in connection with various natural events such as earthquakes, hurricanes or tsunamis.
A bet against the catastrophe
Such bonds thus transfer part of their risk to the buyer. The payment obligations or repayment claims depend on these securitized Bonds on precisely defined natural events. While the coupon payment and the repayment of the nominal value of normal bonds depend on the solvency of the debtor, the interest and repayment of a catastrophe bond is based on a strictly defined event.
Such an event is also referred to as a trigger among experts. If this so-called trigger is triggered, the creditors’ claim to repayment for the bond expires and the capital collected from the securitized bond benefits those affected by the respective disaster. However, if such an event does not occur during the term of the bond, the creditor receives high annual coupon payments and the full repayment of the bond’s face value.
The history of the CAT bond
The investment solution that enables investors to hold insurance risks is also known as an insurance-linked strategy, or ILS for short. The origins of such ILS products go back to 1992. This year, Hurricane Andrew caused damage totaling 17 billion US dollars in the US state of Florida. At that time, however, the insurance industry was only prepared for a loss of around 8 billion US dollars and had therefore massively underestimated the risks of such a natural disaster.
As a result of this incident, some insurance companies came up with the idea of issuing a securitized and tradable reinsurance contract in order to enable reinsurers to transfer risks in an alternative manner. Since these high-interest bonds were received very positively by the capital market, more and more insurance companies issued such CAT bonds in the following years.
While the total volume of catastrophe bonds was still around two billion US dollars in 1999, it was almost 38 billion US dollars in 2018.
Reasons to Buy a Catastrophe Bond
The lack of correlation between CAT bonds and traditional assets such as stocks and gold offers major advantages for investors. At the height of the Corona crisis, catastrophe bonds were spared any market turbulence and were thus able to protect investors’ capital to a certain extent or reduce volatility.
CAT bonds thus offer a relatively stable source of alternative returns that tend to develop independently of traditional asset classes. In addition, catastrophe bonds have a very solid current account record, which further underlines the value of this asset class as a diversification option for the personal portfolio.
High return risk
As measured by the Global CAT Bond Index of the reinsurance company Swiss Re, investors have only achieved positive returns with catastrophe bonds since 2002. In the period between 2002 and 2018, the index was able to gain an average of 7.2 percent per year. Given such a performance, it is hardly surprising that more and more investors, whether institutional or private, are interested in CAT bonds. Some private banks even recommend a CAT bond share of 5 to 10 percent in their portfolio to their customers.
The past, high-yield years should not, however, hide the considerable risks that are involved in investing in CAT bonds. Because if a major natural disaster suddenly occurs, the respectable return that has been achieved over several years can evaporate within a very short time.
Opportunities for private investors
There are various options for private investors who would like to take a closer look at the topic of CAT bonds or are thinking about a possible commitment. Since the issuers of catastrophe bonds are primarily aimed at institutional investors and pension funds, the face value of such bonds is often in the range of 100,000 to 1,000,000 US dollars, which makes direct investments very difficult for private investors, depending on the portfolio size.
Accordingly, private investors usually have to resort to various fund products that are now also issued by insurance companies such as the Swiss reinsurance company Swiss Re or the French insurance group AXA.
Funds offer the great advantage that they invest in various CAT bond constructions, which considerably reduces the risk of a total loss for the investor. However, should a devastating event of the century actually occur, such funds are also likely to collapse. Every investor should always be aware of this.
Pierre Bonnet / Forex-news.com.net
This text is for informational purposes only and does not represent an investment recommendation. Finanzen.net GmbH excludes any right of recourse.
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