Global Pension Funds Bullish On Cat Bonds
Global pension funds are increasingly turning to specialist catastrophe bonds — a field where Bermuda currently has an edge — that bet on the likelihood of a natural disaster in a search for yield and returns that are not correlated to the rest of the market, the Reuter news service reports today [Apr. 8].
What was once considered an exotic investment for specialists, catastrophe bonds, or “cat bonds”, have gone mainstream.
Last week a local newspaper reported Bermuda can lay claim to about one third of the global cat bond market and is looking to continue to expand in that area.
Pension funds accounted for 14 percent of direct investment in new cat bonds issued last year, from zero in 2007, according to data provided to Reuter by reinsurer Swiss Re.
Asset managers including Baillie Gifford and F&C Asset Management now represent 17 percent of overall investment, compared to 12 percent in 2007.
“What has changed in the last few years is that the broader investment community has become much more aware of the asset class,” Adam Alvarez, senior vice-president at Bermuda-based insurer and reinsurer Hiscox, told Reuter.
Catastrophe bonds are a form of Insurance-Linked Securities, financial instruments sold by insurers and reinsurers to share the risk they take on for natural catastrophes.
The bonds were developed after Hurricane Andrew hit the United States in 1992 causing more than $26 billion in damage, the costliest storm in US history at the time.
The buyers receive an income but forfeit their original investment if a natural disaster occurs, helping insurance companies raise funds for payouts for the world’s most expensive risks – primarily storms and earthquakes in rich countries like the United States and Japan.
The sector is still small — just $16 billion in size — but ended 2012 on a high – with more than $6 billion in sales, the second highest total in the market’s history.
At the 2012 Bermuda Captive Conference, it was revealed that Special Purpose Insurers [SPIs] have become the fastest growing type of Bermuda market insurer as demand for catastrophe bonds soars.
Leslie Robinson, Assistant Director, Insurance Licensing and Authorisation, at the Bermuda Monetary Authority [BMA], told the conference the SPI classification was introduced in Bermuda in 2010 and
provides a sound legal and regulatory framework for vehicles used for collateralised reinsurance products, including cat bonds, industry loss warranties and sidecars.
Brad Adderley, partner at international law firm Appleby, told the conference Bermuda was now a superior cat bond jurisdiction compared to those where deals were taking “months” to go through.
“In Bermuda, the process is smooth and quick,” Mr. Adderley said. “Speed to market is very important.”
Although it might be difficult to win business from sponsors who traditionally placed cat bonds elsewhere, Mr. Adderley felt Bermuda also had the edge because of the island’s reinsurance market and related expertise.
