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Home News Alt Assets

Catastrophe Bonds Surge Amid Looming Hurricane Threats

by Team Lumida
June 10, 2024
in Alt Assets, Macro
Reading Time: 3 mins read
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Photo by NASA on Unsplash

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Key Takeaways:

  1. Cat bond sales soared 38% through May 2024, reaching record highs.
  2. Investors face heightened risks due to active hurricane forecasts.
  3. Market dynamics could offer higher returns amid increased spreads.

What Happened?

Catastrophe bond sales reached unprecedented levels as markets brace for an unusually active hurricane season. Cat bond issuance surged 38% through May 2024 compared to the same period in 2023, according to Artemis. In May alone, $4 billion in cat bonds were issued, marking the highest monthly volume ever recorded.

These bonds allow insurers to transfer risk to capital markets, offering significant gains if no catastrophe occurs but posing substantial losses otherwise. The total outstanding value of cat bonds now stands at $49 billion.

Why It Matters?

Investors must pay attention to these developments due to the potential for high returns and significant risks. The hurricane season forecast includes 23 named storms, 11 hurricanes, and five major hurricanes, as predicted by scientists at Colorado State University. This is notably higher than the historical average, raising the likelihood of catastrophic events.

Veteran investors are already adjusting their portfolios, focusing on bonds triggered by rare, large events. Additionally, the rising risks have pushed cat bond spreads up by 23% between March and May, indicating higher returns but also reflecting increased market caution.

What’s Next?

Investors should monitor weather forecasts closely and consider the heightened risks of holding cat bonds, especially those tied to high-risk areas like Florida. Issuers are already responding to these risks by offering higher returns to attract investors. For instance, Florida’s Citizens Property Insurance Corp. issued a $1.1 billion cat bond, and the Texas Windstorm Insurance Association sponsored a $1.4 billion bond.

The World Bank also continues to expand its cat bond programs, recently issuing bonds for Mexico and Jamaica. As the hurricane season progresses, the financial impact will depend significantly on where storms make landfall. A major hit on densely populated areas could lead to substantial losses, emphasizing the need for strategic investment decisions in this volatile market.

Additional Considerations:

Investors should compare the current market dynamics with historical performance to gauge potential outcomes. The rising frequency of costly storms due to climate change adds another layer of complexity.

Moody’s notes that 17 of the 19 costliest US hurricanes occurred in the past 20 years, increasing the risk for insurers and investors alike. As some insurers retreat from high-risk areas, the market for cat bonds may see further shifts, presenting both challenges and opportunities for savvy investors.

Source: Bloomberg
Tags: Catastrophe bondsHurricane season
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© 2025 Lumida Wealth Management LLC is an SEC registered investment adviser. Privacy Policy. Cookies Policy.
Disclaimer Important Information This site is for informational purposes only. Information presented on this site does not constitute as investment advice.

Lumida Wealth Management LLC (‘Lumida”) is an SEC registered investment adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability.

Lumida's website (referred to herein as the "Website") is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Accordingly, the publication of the Website on the Internet should not be construed by any client and/or prospective client Lumida’s solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the Internet.

Any subsequent, direct communication by Lumida with a prospective client will be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides.

‍Lead Capture Forms: By submitting your contact information in the forms on this site, you are not obligated to invest in Lumida's product or services.
‍Address: Lumida Wealth Management, 25 W 39th Street Suite 700, New York, NY 10018