Catastrophe Bonds

Catastrophe Bonds

THE SECURITIZATION OF INSURANCE RISK: CATASTROPHE BONDS

Catastrophe (cat) bonds are one of a number of innovative risk transfer products that have emerged as an alternative to traditional insurance and reinsurance products. Insurers and reinsurers typically issue cat bonds through a special purpose vehicle, a company set up specifically for this purpose. Cat bonds pay high interest rates and diversify an investor's portfolio because natural disasters occur randomly and are not associated with economic factors. Depending on how the cat bond is structured, if losses reach the threshold specified in the bond offering, the investor may lose all or part of the principal or interest.

Catastrophe bond issuance in 2015, at $5.92 billion, was less than the record high of $7.9 billion in 2014, according to the GC Securities division of MMC Securities Corp. Catastrophe bond issuance was markedly low in the fourth quarter of 2015, in contrast with a record first quarter. Catastrophe bond risk capital outstanding fell slightly to $22.44 billion in 2015, from  $22.77 billion in 2014. GC Securities expects in the absence of a major market disruption, issuance in 2016 will be similar to the last several years as new sponsors incorporate alternative capital into their strategies.

 

TOP 10 CATASTROPHE BOND TRANSACTIONS, 2015

($ millions)

Rank Special purpose vehicle Sponsor name Risk amount Peril Risk location
1 Alamo Re Ltd. Series 2015-1 TWIA $700.0 Hurricane Texas
2 Kilimanjaro Re Ltd. Series 2015-1 Everest Re 625.0 Hurricane and earthquake U.S.
3 Cranberry Re Ltd. Series 2015-1 MPIUA 300.0 Hurricane Massachusetts
4 Acorn Re Ltd. Series 2015-1 Kaiser Permanente 300.0 Earthquake U.S. and Mexico
5 Galileo Re Ltd. 2015-1 Catlin 300.0 Hurricane and earthquake U.S., Canada, Europe
6 Merna Re Ltd.  State Farm 300.0 Earthquake New Madrid
7 Everglades Re II Ltd. Florida Citizens 300.0 Hurricane Florida
8 Long Point Re III Ltd. Travelers 300.0 Hurricane and earthquake U.S.
9 Nakama Re Ltd. 2015-1 Zenkyoren 300.0 Earthquake Japan
10 Kizuna Re II Ltd. Series 2015-1 Tokio Marine & Fire 290.0 Earthquake Japan

Source: GC Securities, a division of MMC Securities Corp., a U.S. registered broker-dealer, member FINRA/SIPC, and Guy Carpenter.

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CATASTROPHE BONDS, ANNUAL RISK CAPITAL ISSUED, 2006-2015

($ billions)

Source: GC Securities, a division of MMC Securities Corp., a U.S. registered broker-dealer, member FINRA/SIPC, and Guy Carpenter.

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CATASTROPHE BONDS, RISK CAPITAL OUTSTANDING, 2006-2015

($ billions)

Source: GC Securities, a division of MMC Securities Corp., a U.S. registered broker-dealer, member FINRA/SIPC, and Guy Carpenter.

View Archived Graphs