Investors Find Nature Safer Than Economy; Bonds against Earthquakes, Hurricanes and Such Grow in Popularity as a Safe Haven from Market

Article excerpt


So-called catastrophe bonds, a backup plan designed to protect insurers from the costs of Mother Nature's worst visitations, are getting new attention from investors following the recent wave of earthquakes, floods, tropical storms and other natural disasters.

Investors, turned off by the turmoil in the financial markets, are instead taking their chances and betting against natural disasters like earthquakes and hurricanes. Most of the time, they get good returns on their money. If a catastrophe strikes, though, they can lose everything.

Ironically, catastrophe bonds, or cat bonds, are considered a relatively safe gamble compared to the volatile financial markets of late. For investors seeking shelter from the wild swings on Wall Street, the U.S. debt downgrade and the euro crisis savaging Europe, catastrophe bonds represent a move to diversify into a market facing completely unrelated risks.

The financial markets tanking don't increase the possibility that there's going to be an earthquake, said Judy Klugman, managing director and head of insurance-linked securities distribution at Swiss Re, a reinsurance company that issues catastrophe bonds for its client insurers. Investors are just generally nervous about everything that's going on in the financial world. Right now, they think this is a safe haven. They don't know where else to put their money.

The $11.5 billion cat bond market is still small compared to the global corporate bond market of $7.5 trillion, according to John Forney, managing director of public finance at Raymond James & Associates Inc.

But demand is growing, and the catastrophe bond market has jumped 2.8 percent since Hurricane Irene made landfall in late August.

Swiss Re is trying to increase of the size of the market so it can pay interest rates for the bonds it sells. As you create more and more demand, Ms. Klugman said, the spread will go down.

The task is becoming easier for Swiss Re because demand is up, as, it appears, is the supply of disasters to pay for.

The tab in New Orleans from Hurricane Katrina was enormous. More recently, Japan was ravaged by an earthquake, a tsunami and a nuclear meltdown, while deadly tornadoes ripped through Joplin, Mo. …