Capital Markets

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 $7.1 billion  in 2013, up from $5.9 billion in 2012, according to the GC Securities division of MMC Securities Corporation. Catastrophe bond risk capital outstanding rose to $18.6 billion during the same period, also a record high. GC Securities reported that catastrophe bond issuance was extremely strong in the first-half of 2014, with a record issuance of $5.7 billion. Total risk capital outstanding was at an all-time high of $20.8 billion. The firm noted that even with no further activity for the remainder of 2014, the year would still place as the fourth largest year in terms of new issuance.

 

TOP TEN CATASTROPHE BOND TRANSACTIONS, 2013

($ millions)

Rank Special purpose vehicle Sponsor name Risk amount Peril Risk location
1 Tar Heel Re 2013-1 NCJUA / NCIUA $500.0 Hurricane North Carolina
2 Bosphorus 1 Re 2013-1 TCIP (Turkey) 400.0 Earthquake Turkey
3 Green Fields II 2013-1 Groupama S.A. 365.7 Windstorm France 
4 Caelus Re 2013-2 Nationwide 320.0 Hurricane/earthquake U.S. 
5 Galileo Re 2013-1 Catlin  300.0 Hurricane/earthquake/windstorm U.S. and Europe
6 Long Point Re III 2013-1 Travelers 300.0 Hurricane Northeast U.S.
7 Merna Re IV State Farm 300.0 Earthquake U.S., New Madrid
8 Nakama Re 2013-1 Zenkyoren 300.0 Earthquake Japan
9 Caelus Re 2013-1 Nationwide 270.0 Hurricane/earthquake U.S. 
10 Everglades Re 2013-1 Florida Citizens 250.0 Hurricane Florida

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, 2004-2013

($ 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, 2004-2013

($ 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