The mortgage-backed securities woes have not diminished interest from investors in securities linked to insurance policies, according to the Wall Street Journal.
The bonds are linked to insurance policies on people’s live or properties or tied to the risk of an insured event such as a hurricane happening. Usually insurers package their policies and issue the bonds, and mutual funds, hedge funds or pension funds buy them.
A well-known type of bond is the catastrophe bonds or “cat bonds” which are linked to natural disasters in the U.S. or globally.
One appeal to investors of the cat bond is the lack of correlation to the broader market.
Recently, some new bonds were issued. AXA SA France securitized a batch of German, Belgian, Italian and Spanish car-insurance policies in June. German insurance company Allianz SE issued a $150 million cat bond linked in part to flood damage in the U.K. in April.
Several hedge funds and mutual funds have been structured to invest primarily in insurance-linked bonds. Prices for the securities have remained steady despite the recent turbulent market, according to participants in the market.
The market is still relatively new, as the first cat bond was issued in the mid-1990s. Swiss Re estimates the market could grow to $150 billion to $350 billion, said Dan Ozizmir, head of Swiss Re’s insurance-linked securities group.
Insurers are looking to package more of the securities in unique ways and with different risks such as bonds or derivatives. The appeal for insurers is that selling off risks can increase profits by allowing the company to sell more policies without needing more money in the bank. Investors like the opportunity to invest at above-average yields and have money in an asset class that shouldn’t move in the same cycles as traditional stocks and bonds.
The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.