Investing in disaster

Catastrophe bond issuance grew 37% in 2012. Increases in the number of natural disasters and investors' appetite for higher returns are likely to be key drivers of growth for the market.

In 2012, 71% of outstanding cat bonds were exposed to U.S. hurricane risk in one form or another, up from 67% in 2011.

The Eurekahedge ILS Advisers index, which tracks performance of hedge funds that invest in cat bonds, returned an annualized 7.01% since its inception in 2005. Investment in reinsurance stocks provides exposure to these types of risk premiums, but also exposure to overall market risk.

Perhaps cat bonds' greatest benefit is their uncorrelated return with financial assets. Movements in financial markets have minimal effect on bonds whose payoffs are determined by nature.