Cat Bonds Are Beating Corporates

Outperformance is biggest in nine months as investors chase returns.

Returns on catastrophe bonds are exceeding those on corporate debt by the most in nine months as investors facing record-low yields chase returns detached from economic performance.

The bonds, designed to protect insurers from payouts on natural disasters such as hurricanes, have gained 1 percent this month, compared with a loss of 0.9 percent for company debt, according to the Swiss Re Cat Bond Total Return index and Bank of America Merrill Lynch data. Returns on dollar-denominated cat bonds were half those of corporates in 2011 as an earthquake and nuclear accident in Japan sparked record losses.

Europe Risk

The Markit iTraxx Crossover Index of credit-default swaps tied to 50 mostly junk-rated European companies fell five basis points to 563, the lowest since March 20, according to prices compiled by Bloomberg.

Higher Returns

Cat bonds have returned 5.3 percent since the end of March, following a 0.45 percent gain in the first quarter, according to the Swiss Re index.

Investor Appeal

Citizens Property Insurance Corp., Florida’s state-owned insurer, more than tripled its target amount in a debut sale of obligations designed to protect against losses from hurricanes to $750 million in April, the biggest offering on record of cat bonds. Goldman Sachs managed the sale.

Portfolio ‘Diversifier’

Cat bonds, which gained 3.3 percent last year even after a 4 percent drop in the weeks following Japan’s 8.9-magnitude temblor on March 11, have posted positive gains every year since at least 2002.

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