How to Bet On the Apocalypse

Date: Thursday, January 13, 2011
Author: Mike Taylor, The New York Observer

With fish and birds (sort of) mysteriously dying and 2012 a mere 358 days away, insurance companies are ratcheting up their bets that the end-times are upon us. The New York Times' Azam Ahmed reports that "catastrophe bonds," securities that respond when disasters like hurricanes and earthquakes strike, are becoming increasingly popular:

Amid the volatility in the markets, wealthy individuals and big institutions are flocking to hedge funds that buy so-called catastrophe bonds and other investments tied to the probability of Gulf Coast hurricanes, Japanese earthquakes, large snowfalls in Canada and other natural disasters.

Insurers are selling these bonds to investors. If the world remains peaceful and calm, buyers of the bonds get a healthy return, but they can lose their shirts if all hell breaks loose. The Times says the bonds are mainly a vehicle for investors to diversify ...

Catastrophe bonds and other insurance-related securities have no correlation to the broader markets. In 2008, the Swiss Re catastrophe bond index rose 2.3 percent, compared with a loss of 38 percent in the Standard & Poor's 500-stock index. The catastrophe bond index returned 10.5 percent from 2007 through 2010, compared with an 11 percent fall in the S.&P.

... but we can't help but wonder if the insurance companies are really selling these securities as a play on the coming boom in the fire-and-brimstone markets.

mtaylor [at] observer.com | @mbrookstaylor