WEST PALM BEACH, FL (HEDGECO.NET) – In an article by Mike Anderson and Oliver Suess, Bloomberg poses a story with a twist on hedge funds and \u00c3\u00a2\u00e2\u201a\u00ac\u00c5\u201ccatastrophe bonds.\u00c3\u00a2\u00e2\u201a\u00ac\u00c2\u009d As insurers sell more of the securities to protect themselves from increasingly unstable weather triggered by global warming.<\/p>\n
Hurricane Katrina produced record claims of more than $90 billion last year. Hedge funds are embracing that risk, after seeing yields of as much as 40 percentage points more than investment-grade debt. Investors forecast sales of catastrophe bonds may triple to $4 billion this year. <\/p>\n
A catastrophe bond is high-yield debt instrument that usually pays higher yields because investors may lose their entire stake in the event of a disastert it is usually insurance linked and meant to raise money in case of a catastrophe such as a hurricane or earthquake. It has a special condition that states that if the issuer (insurance or reinsurance company) suffers a loss from a particular pre-defined catastrophe, then the issuer\u00c3\u00a2\u00e2\u201a\u00ac\u00e2\u201e\u00a2s obligation to pay interest and\/or repay the principal is either deferred or completely forgiven. <\/p>\n
While politicians and scientists argue over the extent to which global warming is changing the planet, the insurance industry has concluded the phenomenon is real. <\/p>\n
“Global warming is leading to higher sea surface temperatures in the Atlantic, which is the most important factor for the rising intensity of hurricanes,\u00c3\u00a2\u00e2\u201a\u00ac\u00e2\u201e\u00a2\u00c3\u00a2\u00e2\u201a\u00ac\u00e2\u201e\u00a2 says Eberhard Faust, head of climate risk research at Munich Re\u00c3\u00a2\u00e2\u201a\u00ac\u00e2\u201e\u00a2s Geo Risk Research department. The unit employs some 25 people, including scientists who analyze the likelihood of earthquakes, hurricanes and floods. <\/p>\n
Invented after Hurricane Andrew devastated the Florida coast in 1992, triggering then-record losses of $20 billion, catastrophe bonds remained a minor tool for spreading insurance risk for the next decade. <\/p>\n
Hedge funds bought the highest-risk bonds, which paid more than 39 percentage points over the London interbank offered rate, or Libor, says Martin Bisping, the Zurich-based head of risk- sharing at Swiss Re. Those securities carry the highest reward because they cover multiple perils: North Atlantic hurricanes, European windstorms and earthquakes in California and Japan. <\/p>\n<\/div>\n
Alex Akesson
Contributing Writer
HedgeCo.Net
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