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 reached a record high of $8.03 billion in 2014, up from $7.1 billion in 2013, according to the GC Securities division of MMC Securities Corporation. Catastrophe bond risk capital outstanding rose to $22.9 billion during the same period, also a record high.

 

TOP TEN CATASTROPHE BOND TRANSACTIONS, 2014

($ millions)

Rank Special purpose vehicle Sponsor name Risk amount Peril Risk location
1 Everglades Re 2014-1 Florida Citizens $1,500.0 Hurricane Florida
2 Sanders Re Ltd. 2014-1 Allstate 750.0 Hurricane and earthquake U.S.
3 Kilimanjaro Re 2014-2 Everest Re 500.0 Earthquake U.S. and Canada
4 Tradewynd Re Ltd. 2014-1 AIG/National Union/Chartis 500.0 Hurricane and earthquake U.S. and Canada
5 Kilimanjaro Re 2014-1 Everest Re 450.0 Hurricane and earthquake U.S.
6 Alamo Re Ltd. Series 2014-2 TWIA 400.0 Hurricane Texas
7 Ursa Re Ltd California Earthquake Authority 400.0 Earthquake California
8 Nakama Re Ltd. 2014-2 Zenkyoren 375.0 Earthquake Japan
9 Merna Re V 2014-1 State Farm 300.0 Earthquake New Madrid
10 Nakama Re Ltd. 2014-1 Zenkyoren 300.0 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, 2005-2014

($ 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, 2005-2014

($ 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