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, 2016 (1)

($ millions)

Rank Special purpose vehicle Sponsor name Risk amount Peril Risk location
1 Galilei Re Ltd. 2016-1 XL Insurance (Bermuda) Ltd. $750.0 U.S. named storm, North America earthquake, Europe windstorm, Australia tropical cyclone, Australia earthquake U.S., North America, Europe, Australia
2 Nakama Re Ltd. 2016-1 Zenkyoren 700.0 Earthquake Japan
3 Ursa Re Ltd California Earthquake Authority 500.0 Earthquake California
4 Residential Reinsurance Limited 2016-2 USAA 400.0 Tropical cyclone, earthquake, severe thunderstorm, winter storm, wildfire, meteoric impact, volcanic eruptions, other U.S. 
5 Atlas IX Capital DAC 2016-1 Scor Global P&C SE 300.0 U.S. named storm, U.S./Canada earthquake U.S., Canada
6 Galileo Re Ltd. 2016-1 XL Insurance (Bermuda) Ltd. 300.0 U.S. named storm, U.S./Canada earthquake, Europe windstorm U.S., Canada, Europe
7 Caelus Re IV Limited 2016-1 Nationwide Mutual Insurance Co. 300.0 Named storm, earthquake, severe thunderstorm, winter storm, wildfire, volcanic eruption, meteorite impact U.S.
8 Merna Re Ltd 2016-1 State Farm 300.0 Earthquake U.S. New Madrid
9 Citrus RE Ltd. 2016-1 Heritage Property and Casualty Insurance Co.;Zephyr Insurance Co. Inc. 250.0 Named storm  U.S.
10 Residential Reinsurance Limited 2016-2 USAA 250.0 Tropical cyclone, earthquake, severe thunderstorm, winter storm, wildfire, meteoric impact, volcanic eruptions, other U.S.

(1) Excludes non-property/casualty deals.

Source:  GC Securities, a division of MMC Securities LLC., a registered broker-dealer, member FINRA/SIPC.

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Catastrophe Bonds, Risk Capital Outstanding And Annual Issued, 2007-2016

(US$ billions)

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

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