Cat bonds to become increasingly “mainstream” investments: Houghton, Fermat

Catastrophe bonds are likely to become an increasingly “mainstream” component of institutional investor portfolios, as the asset class comes under increasing attention having proved its value again during the volatility driven by the pandemic, according to Brett Houghton, Managing Director at Fermat Capital Management.

The catastrophe bond asset class and other insurance-linked securities (ILS) or direct investments into reinsurance risk have again weathered an economic storm and come out the other side gaining greater attention from investors.

Proving their value as an asset class that offers defensive qualities in times of capital market stress, as well as robust returns that are relatively uncorrelated to broader economic drivers, catastrophe bonds, ILS and reinsurance are in for a period of increasing interest it seems.

Speaking with magazine Deutsche Pension & Investments recently, Houghton discussed the prospects for cat bond and ILS investments after Covid-19. Houghton said that the benefits of investing in cat bonds, which also apply to other ILS and reinsurance linked assets, continued to apply since the Covid-19 coronavirus outbreak emerged.

The lack of correlation “provided investors with capital preservation” during a time of significant capital market volatility, becoming one of only a few asset classes to continue delivering and also marketplaces that kept operating through the majority of the uncertainty.

Having proved their worth again, “Cat bonds remain a permanent and growing source of capital for managing global risks,” Houghton said.

“In the future, they are likely to establish themselves more and more as a “mainstream” investment, because investors’ understanding of this asset class is growing.”

Cat bonds also play an important role in disaster risk financing and management, Houghton explained, as they “help close the growing disaster gap” offering global insurance and reinsurance markets “capital that supports growth and efficient functioning.”

Adding, “They also enable insurers and government agencies to manage systemic disaster risk with an efficient, forward-looking approach. We believe that this has a measurable positive impact on people’s quality of life. At the same time, they achieve attractive and really uncorrelated risk-adjusted returns for investors.”

Even at the height of the coronavirus pandemic, catastrophe bonds have remained relatively immune to the broader financial market turmoil and continued to perform, while protecting investor capital, Houghton continued.

Overall, the pandemic has once again highlighted that catastrophe bonds and ILS offer a stable and differentiated source of alternative returns, that are largely independent of other more traditional asset classes, Houghton said.

In addition, cat bonds carry little exposure to credit, interest rate and other financial market risks, while as an asset class they have a solid track record, even though they have experienced some of the greatest catastrophe loss activity in history over the last few years.

Institutional investor interest in catastrophe bonds continues to grow, while the market has been buoyant and issuance continues to be brisk in an environment where rates have increased.

All of which adds up to a compelling investment proposition at this time, that should ensure interest in cat bonds continues to rise and they become an increasingly common feature in investor portfolios.

View details of almost every catastrophe bond transaction ever issued in the Artemis Deal Directory.