| LONDON, April 11
LONDON, April 11 The newfound popularity of
specialist bonds linked to natural disasters has knocked
investment yields down to all-time lows, cutting costs for
insurers of events like hurricanes and earthquakes.
Insurers have used catastrophe bonds since the 1990s to
manage their exposure to natural disasters by transferring
potential losses to investment funds.
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The investor returns generated by these bonds have dropped
by 22 percent, traders say, as demand for assets with income
streams that are uncorrelated with other more mainstream
securities continues to soar.
The cost to insurers of issuing cat bonds has fallen by up
to 70 percent in 2013.
"If you compare a bond that was issued in 2007 and today
with the same risk profile, spreads are at their tightest right
now," Judith Klugman, head of ILS distribution and sales at
A recent bond issued by U.S. insurer State Farm, Merna Re
IV Ltd, closed with an interest spread of 2.5 percent - the
lowest threshold for minimum spreads in five years, according to
Spreads are the amount of cash that investors make from the
coupons, or interest payments, they receive for investing in a
cat bond. If they are tight, it means the spread over a
reference rate is getting less.
Investors typically see average returns of up to 8.5 percent
for cat bonds, but not enough deals are being issued quickly
enough to keep up with demand.
So transactions have been heavily oversubscribed - pushing
yields down by up to 22 percent compared with last year,
according to Swiss Re data.
Pension funds and money managers have flooded the cat bond
market chasing uncorrelated and high returns.
"We're seeing spreads being very tight and new bond coupons
much lower than we can believe," said Sandro Kriesch, a partner
at Zurich-based fund manager Twelve Capital.
One cat bond deal closed in March by Florida's largest
property insurer Citizens Property Insurance Corp, is the most
aggressive example of downward pricing in the sector's history.
The $250 million bond, Everglades Re Ltd, covers the
insurers from hurricanes in Florida.
Even though this bond covers more risk than an identical
transaction issued by Citizens last year, the bond priced at 10
percent above U.S. money market yields compared with 17 percent
Despite cat bond returns being at their lowest, they are
still "better than what investors can get in the wider financial
markets," Klugman said.