Catastrophe bonds allow insurers and reinsurers to transfer risks associated with major weather events to investors.
The back-to-back barrage of hurricanes Helene and Milton could trigger big losses for investors in catastrophe bonds.
The fixed-income securities allow insurers and reinsurers to transfer risks associated with major weather events to investors.
Investors who buy cat bonds can see big returns if it’s a relatively quiet year for hurricanes and other natural disasters. As long as there are few extreme weather events or damage from any event is mild, investors continue to collect the relatively high yield on the bonds.
That’s what happened in 2023, when there were just a few major hurricanes relatively tame in terms of the damage they brought to Florida and surrounding states.
The Swiss Re Global Cat Bond Index surged 20% in 2023, nearly matching the S&P 500’s 24% gain last year. The solid returns reflected the sleepy hurricane season last year.
However, on the other hand, a strong hurricane can trigger various clauses within catastrophe bonds, resulting in big losses for investors.
