High risk, high reward: How Wall Street cashes in on hurricane risks in Louisiana

In recent years, as Louisiana's insurer of last resort found it more difficult — and expensive — to buy protection from major hurricanes, its leaders waded into a niche corner of the global financial industry.

Citizens Property Insurance Corp. began selling "catastrophe bonds," making a trade-off with giant investors like hedge funds and pensions: If disaster strikes, the investors lose their entire investment. If it doesn't, Citizens pays them a tidy profit.

The effect is millions of Louisiana homeowners' premium dollars flowing to investors around the world who are making a high-risk, high-reward wager that a hurricane won't wipe out the state.

Climate change, migration into risky areas and inflation have upended the global network of companies that backstop the risk of disasters like hurricanes in Louisiana, wildfires in California and earthquakes in Japan. But in this little-known industry, the financial instruments known as cat bonds are booming.

The dynamic underscores an uncomfortable truth about Louisiana's insurance crisis. While Louisiana homeowners are being squeezed out of their homes because of soaring insurance costs, the tumultuous insurance market has opened up a prime opportunity for investors around the world.

It's another sign that Louisiana's insurance problem is intertwined with a global industry of insurers, reinsurers, investors and others who in many ways dictate what homeowners in the Pelican State pay.

In other words: it's not only hurricanes like Katrina and Ida that dictate home insurance costs here. It depends on the frequency and scale of disasters around the world.

As hurricanes and other disasters continue to worsen, catastrophe bonds are poised to grow. Already, a flood of capital is entering the market, as investors look to capitalize on strong returns.

Milton Lane, a reinsurance consultant, told a recent gathering of executives at a Bermuda conference about cat bonds and other reinsurance instruments that the cat bond market has outperformed expectations.

"I think it should be bigger," he said. "I think it should be better."

"There's a lot of room to grow here if we can get our story straight."

A $60M bet

As Hurricane Ida barreled toward south Louisiana three years ago, residents in Houma and New Orleans were not the only ones anxiously watching the forecast.

So too were reinsurance brokers, investors and middlemen around the world.

Louisiana Citizens Property Insurance Corp., the state's insurer of last resort, had been looking for protection in case this type of storm came ashore. So it sold several cat bonds to investors.

Investors in Citizens' so-called cat bond, called Catahoula Re, were making a big bet. They put up $60 million in hopes that hurricanes would miss Citizens' policyholders, who are widespread in the state's coastal communities. In exchange, Citizens was set to pay investors more than $6 million.

Then Ida struck in 2021, causing mass devastation in Louisiana. The bond had a trigger of $245 million in damages, and Ida's damage easily eclipsed that, causing $480 million in losses to Citizens. The bond went to zero, and the investors lost their money. Citizens benefitted, getting the investors' money to pay claims of homeowners in Louisiana who had losses. Ida was so bad that another cat bond also paid Citizens the entire $75 million.

Louisiana Citizens is the biggest sponsor of catastrophe bonds in Louisiana, according to publicly available data. And the insurer has increasingly leaned into the market to build its reinsurance "tower" — a series of deals with reinsurance companies aimed at ensuring Citizens has enough money to pay claims in the event of a major catastrophe.

From 2012-2018, the insurer issued cat bonds amounting to $565 million. In the past four years alone, it has already issued cat bonds totaling $830 million.

An analysis of the terms of the deals shows Citizens paid about $360 million in premiums for the bonds, which were issued over several years. And it redeemed about $135 million from the two bonds that were triggered after Ida. For comparison, Citizens hauled in about $618 million in total premiums last year, financial records show.

And they've gotten more expensive recently, as the interest rates charged by investors have climbed. For the four bonds issued in 2023 and 2024, Citizens could wind up paying bondholders upward of $180 million if the bonds aren't triggered by a major disaster. That's because the interest rates on the bonds — basically the premium Citizens pays — have climbed into the teens; before Ida, Citizens was paying between 2% and 5%.

The investors in Citizens' bonds were from all over the world, including asset managers in London, France and Switzerland, according to public filings.

"Cat bonds are just another vehicle for filling out our tower," said Joe Sciortino, CFO for Citizens. "When there is not enough appetite in the traditional market at a certain layer and price, cat bonds are another option to fill the hole."

Sciortino said Citizens tries to balance cat bonds and traditional reinsurance to get the best rate and ensure it has enough coverage.

'Paid extremely well'

Once a niche product, cat bonds are a hot commodity among big institutional investors like hedge funds and pensions because of their performance in recent years.

The cat bond industry was invented in 1992, but didn't explode onto the scene until after the financial crash of 2008, when Lehman brothers failed, pulling down some cat bonds with it. In response, the industry reformed how it handled collateral.

Tim Temple, Louisiana's insurance commissioner, said cat bonds weren't a big part of his business the last time he worked as a reinsurance broker, in 2007.

"It's another financial tool insurance companies have to use," Temple said. "It's good to have a blend. In Citizens they've got cat bonds in there, they've got traditional reinsurance. ...That's where having a good reinsurance broker pays off. They're going to bring you the most protection you can afford to buy."

A couple of bonds getting wiped out, like what happened during Ida, doesn't typically make a big dent in the market as a whole.

John Seo, a fund manager with Fermat Capital in Connecticut and perhaps the best-known investor in cat bonds, said in an interview that such losses are expected.

Seo believes much of the trouble in the insurance market can be attributed to the fact that there isn't enough money backstopping risk around the world. In turn, insurers and reinsurers pull back from offering coverage.

Seo is advocating for the market to grow dramatically, tapping into trillions of dollars in the global bond market. Doing so, he contends, would ultimately drive insurance costs down because it would increase the supply of capital backstopping hurricane risk, refashioning the skewed supply and demand.

"We're being paid extremely well," he said. "I've always said this with a straight face. We're getting paid three times more than we would if the market was properly sized."

Cat bonds can also be more expensive than traditional reinsurance because they often fill in holes that reinsurers won't cover.

Citizens isn't the only Louisiana player in cat bonds. SureChoice and SafePoint are the two active insurers in Louisiana that have issued cat bonds with double-digit interest rates, according to Artemis, which tracks the deals. So has FEMA, which handles flood insurance. Generally, riskier cat bonds pay higher rates back to investors.

Birny Birnbaum, a former insurance regulator who runs the Center for Economic Justice, said the growth in cat bonds is a sign of inadequate supply of traditional reinsurance that has backstopped risk for decades.

"Like traditional reinsurance, cat bonds are fickle and very costly," he said. " Unlike traditional reinsurance for which payouts will vary based upon the severity of the storm, cat bonds are all or nothing. As a result, the cat bonds' investors demand a very high price."