This is potentially extremely destabilizing, if any of you remember LTCM.
July 12 (Bloomberg) -- Karsten Bromann won't take a vacation this summer. He'll be tracking hurricanes for his hedge fund. Bromann, a hedge-fund manager at Zurich-based ISPartners Investment Solutions AG, plans to profit from forecasts of more violent storms. He's snapping up ``catastrophe bonds,'' as insurers sell more of the securities to protect themselves from increasingly unstable weather triggered by global warming.
Companies such as Swiss Reinsurance Co. and Munich Re, which provide insurance for insurers, are seeking new sources of funding after disasters such as Hurricane Katrina produced record claims of more than $90 billion last year. Hedge funds are embracing that risk, lured by yields of as much as 40 percentage points more than investment-grade debt. Investors forecast sales of catastrophe bonds may triple to $4 billion this year. ``The reinsurance industry is currently in a state of massive dislocation,'' says Bromann, 40. ``Our expert models tell us last year's estimates of hurricane risk need to be raised by 50 percent. That outlook is a great opportunity.''
Catastrophe bonds, a type of insurance-linked security, pay higher yields because investors may lose their entire stake in the event of a disaster. The chances of such a loss are limited to narrowly defined events such as a strong hurricane that devastates Miami or an intense earthquake that levels San Francisco. If the scenario becomes reality, the cash goes to the seller to cover claims. Ivestors have lost their money on catastrophe bonds only once. Swiss Re in July 2005 sold bonds tied to policies written by Zurich Financial Services AG, Switzerland's largest insurer. Buyers bet Zurich wouldn't suffer claims of more than $1 billion on any hurricane or earthquake in the U.S. in the 28 months to December 2007. Zurich's claims from hurricanes alone amounted to $1.2 billion last year, triggering the loss of all funds put up by investors.
While politicians and scientists argue over the extent to which global warming is changing the planet, the insurance industry has concluded the phenomenon is real. ``Global warming is leading to higher sea surface temperatures in the Atlantic, which is the most important factor for the rising intensity of hurricanes,'' says Eberhard Faust, head of climate risk research at Munich Re's Geo Risk Research department. The unit employs some 25 people, including scientists who analyze the likelihood of earthquakes, hurricanes and floods.
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