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 2016, at $5.4 billion, was little changed from $5.9 billion in 2015 but about $2.6 billion less than the record high of $8.0 billion in 2014, according to the GC Securities division of MMC Securities Corp. Catastrophe bond risk capital outstanding in 2016 of $22.5 billion was virtually unchanged from  $22.4 billion in 2015, and close to the 10-year high of $22.9 billion in 2014.

 

Top 10 Catastrophe Bond Transactions, 2015

(US$ millions)

Rank Special purpose vehicle Sponsor name Risk amount Peril Risk location
1 Alamo Re Ltd. Series 2015-1 TWIA $700 Hurricane Texas
2 Kilimanjaro Re Ltd. Series 2015-1 Everest Re 625 Hurricane and earthquake U.S.
3 Cranberry Re Ltd. Series 2015-1 MPIUA 300 Hurricane Massachusetts
4 Acorn Re Ltd. Series 2015-1 Kaiser Permanente 300 Earthquake U.S. and Mexico
5 Galileo Re Ltd. 2015-1 Catlin 300 Hurricane and earthquake U.S., Canada, Europe
6 Merna Re Ltd.  State Farm 300 Earthquake New Madrid
7 Everglades Re II Ltd. Florida Citizens 300 Hurricane Florida
8 Long Point Re III Ltd. Travelers 300 Hurricane and earthquake U.S.
9 Nakama Re Ltd. 2015-1 Zenkyoren 300 Earthquake Japan
10 Kizuna Re II Ltd. Series 2015-1 Tokio Marine & Fire 290 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, Risk Capital Outstanding And Annual Issued, 2006-2015

(US$ billions)

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