Yield-starved investors are gambling that mother nature will be kind this year as they flock to a risky type of insurance-linked debt known as catastrophe bonds.
Sales of “cat bonds” have hit a record level in the first four months of 2014 as insurance companies take advantage of investor appetite for a type of debt that offers higher yields as well as returns that are uncorrelated to other types of securities.
The bonds allow insurers to transfer some of the risk that they will have to pay out billions of dollars in the event of a natural disaster taking place. While the debt offers juicy returns, investors are at risk of losing their principal if catastrophes such as earthquakes or hurricanes do occur.
“The spreads on these bonds have been incredible and so that has attracted a number of investors,” said Jeff Mohrenweiser, senior director at Fitch Ratings. “There’s been greater demand, and insurance companies are now meeting that demand with increased supply.”