Pagnani set to launch catastrophe bond ETF on NYSE
An exchange-traded fund founded by a former Bermuda ILS excutive will start trading on the New York Stock Exchange next month.
The fund, which will have a portfolio of up to 75 catastrophe bonds, will be managed by King Ridge Capital Advisors. It was founded by former Pimco and Mt Logan Re executive Rick Pagnani (pictured), according to Bloomberg News.
The ETF will open up catastrophe bonds – which have outperformed most fixed income investments in recent years – to a wider group of investors.
“It’s a very nuanced asset class and our goal is to demystify it,” Pagnani, said in an interview with Bloomberg. The fund will be overseen by Texas-based Brookmont Capital Management.
Pagnani, who until last year was running the insurance-linked securities desk at Pacific Investment Management Co. (Pimco), said it’s “challenging to build a diversified catastrophe-bond portfolio for a typical investor on their own”. By packaging cat bonds into an ETF, “we aim to lower some of the barriers to entry”.
Bloomberg said the Swiss Re Global Bond Index rose 17% in 2024, following a record 20% gain the year earlier. A Bloomberg gauge of high-yield US corporate bonds increased 8% last year and 13% in 2023.
Against a backdrop of intensifying extreme weather events fuelled by climate change and the spread of urbanization in areas prone to natural disasters, demand for cat bonds is climbing fast while issuances are increasing as insurers see the benefits of using third-party capital to finance risk.
“A lot of insurance companies are leaving high-peril areas as the risk of owning hard assets increases,” said Ethan Powell, Brookmont’s chief investment officer. So “more capital needs to flow” into cat bonds to provide an additional buffer against future losses, he told Bloomberg.
The cat bond market is currently valued at roughly $50 billion.
Pagnani said the pipeline still looks “rich and continues to build,” which he expects to help drive the market to about $80 billion by the end of the decade.
Catastrophe bondholders have so far managed to avoid major losses despite the devastation caused by recent natural disasters, including Hurricanes Helene and Milton, as well as the fires in Los Angeles. Asset managers that specialize in the bonds continue to calibrate their investment models to reduce the probability of payment clauses being triggered.
The last time investors saw a meaningful dent in their returns was in September 2022, after Hurricane Ian ripped through Florida, leading to about $65 billion of insured losses. Cat-bond losses that year were limited to about 2%, according to the Swiss Re index.
Brookmont and King Ridge are still in the process of finalizing launch partners, and are looking to raise $10 million to $25 million in seed capital, Pagnani said. The ETF recently met regulatory requirements and will trade on the New York Stock Exchange under the symbol ILS, he said.
The fund will cover perils ranging from Florida hurricanes and California earthquakes to Japan typhoons and European windstorms, according to the prospectus filed with the Securities and Exchange Commission.
Cat bonds’ highly complex structure has raised questions as to their suitability for non-specialist investors. In Europe, where investors can gain exposure to cat bonds through UCITS funds, the instruments are listed as securities whose structure makes them difficult for a client to understand the risks involved.
Investing in cat bonds “isn’t without risk”, Pagnani said. But with a diversified ETF, “you can dampen volatility while increasing returns.”
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