catastrophe bond

(redirected from Cat bond)

Catastrophe bond

Also known as cat bonds, these are used as a way for insurance agents to transfer risks to investors. They are often attractive to investors because the risks (like that of an earthquake) are uncorrelated with the business cycle – and, hence, provide natural diversification.

Catastrophe Bond

A high-yield debt security backed by insurance premiums. Insurance companies issue catastrophe bonds in order to raise funds for hypothetical insurance payouts resulting from one or more stated events such as floods or fires. The bondholder receives coupons from what the insurance company collects in premiums. However, if the insurance company suffers a loss from a payout of one of stated events, the obligation to repay the bond is either relaxed or forgiven. The main advantage to a catastrophe bond, despite the stated risk, is the fact that it offers a high yield without much regard for the performance of the broader economy because people and institutions will almost always set money aside for insurance premiums.

catastrophe bond

A debt security with a payoff tied to the relative severity of a natural disaster such as a hurricane or earthquake. Bondholders are paid with insurance premiums but may have to accept reduced principal repayment in the event the specified disaster occurs during the life of the bond.
References in periodicals archive ?
Global Banking News-July 11, 2017--Generali issues cat bond
Michael Popkin, managing director and co-head of ILS at JLTCM, said, "In 2017, we are pleased to close our seventh annual Oak Leaf cat bond, which is one of the longer running cat bonds in the marketplace.
Although the cat bond asset class has withstood the major dislocations during the recent financial crisis fairly well, issuance volumes declined sharply in 2008.
The Swiss Re Cat Bond Price Return Index dropped 1.
1 of capital held by a reinsurer can support as much as $2 or more of insurance writings; cat bond protection is limited to the face amount of the bond.
Series 2015-1) cat bond, which provided reinsurance protection to AIG subsidiary United Guaranty Corporation for the risk of a dramatic increase in mortgage insurance payouts, are more usually ceded to specialty insurers, according to Dubinsky.
Artemis, a leading provider of information on the insurance linked securities and cat bond market compiled the information and research from their data.
The briefing noted that seven new sponsors entered the 144A P&C cat bond market in 2014.
5 billion bond linked to hurricane risk in Florida and the world's first cat bond to protect against storm surge, created by New York City's Metropolitan Transit Authority after it faced $5 billion in damage in Sandy's wake.
However, cat bonds themselves are seeing losses, according to Holborn; hedge funds are moving away from insurance bonds in favor of potentially higher returns on European bonds with higher interest spreads, and new cat bond commitments in 2011, says the company, were lower than in 2007.
As Zeng pointed out, the Cat bond market can still be tricky for investors to enter into, because, for one, no central market exists.
Entitled Cat Bond Update: First Quarter 2009, the report indicated that catastrophe bonds continued to be important tools for risk and capital managers, with three bonds coming to market in the first quarter of 2009, totaling $575 million in fresh capital.