Catastrophe bonds have rates of return in the mid-teens and their losses have hit an all-time low over the last decade, says Phil Cook, chief executive officer of Omega Insurance Holdings, CI Top Broker reports.

Cat bonds help insurers lessen the risk of taking on clients in areas prone to natural disasters, such as Florida. An insurer issues a bond that would pay investors if there are no natural disasters during its validity. If there is a natural disaster, the insurer gets the bond’s principal, helping the company offset the cost of the disaster.

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Last year $2.5 billion in capital came into the cat bond market, says Cook. There’s currently about $20.5 billion in the global cat/excess bond market, he adds.

Some bonds have returns of 17.5% to 18%, he says. “You can image that most of those cat bonds have been extremely profitable. Some of them had absolutely no losses,” says Cook. “Those bond managers are also starting to pay dividends, and that is a very significant issue, because if the investors get a large portion back of what they’ve invested into the funds, they’ll continue to roll that in in the future.”

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But cat bonds come with inherent risks, reports CI Top Broker. It would only take one or two major disasters to cause investors to cool on the bonds, but “in the meantime, it’s a very, very strong investment. Hedge funds, pension funds, endowments, trusts, and now reinsurers are certainly getting on board with the whole cat bond scenario, either as an investor, provider or a manager. There’ s a large amount of reinsurance management going on now of those cat bonds. There’s also an increased number of high-net-worth individuals going into those investments as well.”

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