Insurer-Based Securities, Cat Bonds Not Affected by Credit Debacle
Investors have not shied way from securities linked to insurance policies as they have mortgage-backed securities in light of the subprime crisis.
The insurer-based securities are bonds tied to insurance poliies on people's lives or property. The bonds can also be tied to the risk on an insured event such as a hurricane.
Usually, carriers package their policies and issue the bonds. Institutional investors such as mutual funds, hedge funds and pension funds buy them. Factors such as the death rate, the number of car crashes or the destruction wrought by a hurricane affect the policies' value -- and the return investors make on their bonds.
The most well-known of these bonds are catastrophe bonds or "cat bonds." These are generally linked to natural disasters in the U.S. or overseas.
While bonds backed by mortgages have significantly decreased recently due to spiraling defaults by borrowers in the U.S. -- rattling stock and bond investors in the process -- the market for cat bonds has held up well.
That lack of correlation to the broader market is one of the appeals of this product to investors looking for diversity.
Published on August 23, 2007
Are you a retail Agent Looking for a Quote?