(Bloomberg) -- Issuance of catastrophe bonds just hit a record high, as the market braces for a rough hurricane season with the potential to do substantial...
-- Issuance of catastrophe bonds just hit a record high, as the market braces for a rough hurricane season with the potential to do substantial damage.Sales of so-called cat bonds are 38% higher this year through May than over the same five-month period in 2023, which was already a record, according to Artemis , a compiler of data on insurance-linked securities.
Bonds in the firing line are those that are the most junior in an extreme weather event, said Toby Pughe, an analyst at London-based Tenax. The fund manager is now “even more strict in what we buy,” and is limiting investments to cat bonds that are triggered by statistically rare, large events, he said.
“The US avoided a truly catastrophic hurricane season last year, but if forecasters are correct, we may not be so lucky in 2024,” said Adam Kamins, an economist at Moody’s Analytics, a unit of Moody’s. “With few signs of a slowdown in building in high-risk coastal areas, a major storm would have significant consequences.”
Given the growing risk associated with holding the securities, investors are now demanding higher returns from issuers. Artemis notes that spreads on cat bonds soared 23% between March and the end of May. Meanwhile, insurers and reinsurers are continuing to farm out large chunks of their natural-disaster tail risk to the capital markets. Notable issuers include Citizens Property Insurance Corp., Florida’s property insurer of last resort, which recently finalized a $1.1 billion cat bond ahead of the hurricane period. The Texas Windstorm Insurance Association recently sponsored a $1.4 billion cat bond, its largest ever.
That said, climate change is increasingly becoming a wild card for cat bond investors. Moody’s notes that 17 of the 19 costliest US hurricanes occurred in the past 20 years, even after adjusting for inflation. Added to this is a sharp rise in the frequency of billion-dollar events.
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