ETF would give retail access to cat bonds

The ESG product would seek to expand disaster coverage and provide pricing transparency

cat bonds


Emile Hallez

ETF provider Impact Shares has filed to launch its fifth product, a fund that would invest in reinsurance securities tied to natural disasters.

That fund, the Impact Shares Climate Risk Reinsurance ETF, would use “a proprietary methodology based upon qualitative and quantitative elements, including peril type, geography, payout trigger and issuer”, according to an initial prospectus filed Tuesday with the Securities and Exchange Commission.

Among the goals of the product are increasing capacity for natural disaster insurance for people who will be most affected by climate change, as well as drawing attention to the pricing practices for the bonds that back the insurance, Impact Shares CEO Ethan Powell said.

The ETF would trade on NYSE ARCA with the ticker ROAR. It would invest in catastrophe bonds, whose return of principal and interest payments depend on claims not being made in connection with natural disasters including hurricanes and floods.

“The cat-bond asset class currently doesn’t have any listed or retail products at all,” Powell said, noting that those bonds are usually held by hedge funds and institutional investors. “It’s like a floating-rate fixed income [product], where you’re removing the credit risk premium and inserting weather risk premium.”

Demand for catastrophe bonds “is a barometer for the true cost of increased climate volatility”, he said.

Following Hurricane Ian in Florida in late September, about a third of the catastrophe bond market was repriced, seeing increases of between 8% and 12%, Powell said.

“We want to bring transparency to that. We want to bring more dialog to that,” he said.

Powell, chief investment officer at Brookmont Capital Management, would serve as portfolio manager for the ETF.

Impact Shares’ existing line of products includes The NAACP Minority Empowerment ETF, YWCA Women’s Empowerment ETF, Sustainable Development Goals Global Equity ETF and Impact Shares Affordable Housing MBS ETF.

The latter ETF, which launched last year, was aimed at increasing capacity for lending, Powell said. The Climate Risk Reinsurance ETF “has similar characteristics”, and the underlying bonds “help defray the cost of large-scale catastrophic” events, he said.

The yield on cat bonds has been about 7%, with a 4% default rate, he said, adding that the estimated yields on the bonds in the ETF will be in the low double digits.

The ETF could help people better understand the true cost of the reinsurance that backs catastrophe insurance in a world faced with more frequent, more intense natural disasters as a result of climate change, Powell said.

“That trend is something that the public needs to know about. We also anticipate that insurers will use this more frequently to defray their risk that they view as being difficult to price.”

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