Catastrophe bonds for UK investors: getting paid to weather risks [Members]
For MOGULS by Finumus
on August 28, 2025
Given the many threats seemingly on the cusp of sending humanity the way of the dinosaurs – from climate change to an AI takeover to political polarisation to that president – you’d think ‘catastrophe bonds’ wouldn’t need too much selling.
That’s true too if you’re worried about the high valuation of the US equity market. A NASDAQ bubble bursting wouldn’t blow-up the gene pool. But it would do a number on most US equity-heavy portfolios.
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Thanks Finumus – great article.
Meb Faber’s podcast episode with the Man AHL Cat Bond team is worth a listen:
https://www.themebfabershow.com/episodes/ZjfjB60npYb
Unfortunately the Man fund isn’t accessible on mainstream platforms.
There’s a Franklin Templeton UCITS fund domiciled in Lux – you may have some luck getting that added to retail platforms but it doesn’t appear to be available on any that I can see at present.
Fascinating. Thank you @Finumus. Years ago had tiny stake in CATCo Reinsurance Opportunities Fund Ltd. Sold before 2019 run off. I suppose here it’s all the obvious drawbacks:
1. Picking up pennies in front of an approaching steam roller at unknown distance.
2. Why does the insurance industry want to expand issuance now (“primary supply breaking records”)? The only better time to buy than when there’s blood on the streets is when there’s noone in the streets, with a promising idea being ignored. That doesn’t appear the case here, notwithstanding difficulties in buying this stuff. If I can’t work out who the patsy at the table is, then it’s probably me, and, given info asymmetry, the insurance industry has a better handle on the risk it’s selling than I do on the risk I’d be taking on.
3). What about risks under the missing element in the Rumsfeldian epistemic matrix, unknown knowns? – Insured risks that we actually know about, but which studiously ignore, e.g. next Carrington event/solar flare (grid fried) or pandemic (when, not if). Does 12% p.a. really compensate?
@all — We’ve been getting torrents of spam recently — the robots are finally on the doorstep it appears! — and I just accidentally deleted a couple of hundred spam posts while manually checking for real comments in the mix.
Apologies, but if you posted a comment that was held in moderation and you don’t see it here then it will have been wiped. Any chance you could redo it — thanks!
A great topic to look at. I’ve asked two financial advisors about this, when they have raised the topic of diversification. On both occasions they looked sheepish, and said they would get back to me about it. Neither did. This inability to step outside basic investments and give me access to or a view on things that are a little left-field is one of the main reasons I have not been persuaded that a financial advisor can offer me any value at this stage.
Something like a 5% allocation to cat bonds will need some serious consideration. My main area of investigation would be to understand whether there is any smart money that I would be investing alongside. That might give me confidence that this isn’t just the industry offloading all of its crap.
I’m a lot too overexposed to the insurance industry right now, but if I have an opportunity to divest myself of that, this is something for me to look closely at.
There was an article in the FT [paywalled] this week quoting Munich Re as being concerned about new hedge fund money coming into the space:
https://www.ft.com/content/573a537c-adf7-4373-a8cd-4ef60513eb23
Given the various vested interests involved, I’m not sure what to make of Munich Re’s concern.
But it does flag up high interest in the sector, which probably isn’t ideal from a ‘when to get in’ point of view.
On the other hand, the paucity of retail-friendly trusts etc (compared to a few years ago, as @Finumus notes) might suggest things are not super-crazy at the moment.
It’s a perennial issue for us retail investors that, like the old-timers used to say on Wall Street, the motto of the financial services industry is “When the ducks quack, feed ’em.”
Perhaps I’d do as @Finumus notes and take a small starter position first, and then average down into any dislocation in the future…
Fascinating article. Thank you. I had a look at CATCo a few years back but ultimately decided against as I couldn’t really understand what I would be buying. I didn’t realise the fund has recently been wound up. But this article is food for thought and further research.
Maybe the problem with Cat Bonds isn’t the returns per se, which can be quite like (but uncorrelated with) equities, but rather that investors and insurers both have a deep dislike of uncertainty (where neither outcomes nor probabilities are known or quantifiable).
Uncertainty is why the actuarial EL is not the actual L and why we don’t know how L might come to differ from EL, by how much it might differ, or what the ex ante odds of it doing so are.
The type, frequency and magnitude of catastrophe losses in the past tell us ex post about the historic risk, but don’t help, ex ante, with future uncertainty.
Uncertainty isn’t always necessarily bad. Certainty can be cancerous. The need for certainty has killed more opportunities than failure itself.
But to make it to the future as a Cat Bond investor one needs to survive not the worst that has happened, but rather the worst that could happen.
That’s quite an ask.
When (from the FT article linked by @TI above) I see the reps of the insurance industry sell side meeting in Monaco to discuss creating new ‘product’ lines, I start to wonder if I’m going to end up being their exit liquidity from a tricky situation? (Lloyds Names ring a bell 🙁 )
Risk transfer is great for the transferor but maybe not so much for the transferee.
As the final commentator underneath the FT article puts it: “Regarding cat bonds, the obvious winners here are the policy holders who will pay less because there are more people willing to hold the risk”. Helping out the insured does not seem an especially profitable endeavour for a retail investor.
What about litigation funding? – Like catastrophe bonds it’s completely uncorrelated with the stock market and, indeed, with other assets (at least AFAICT), but is perhaps more asymmetric with possibility no more downside?
Just a thought (see link below):
https://underhood.substack.com/p/a-not-so-late-bull-case-for-burford