Cat Bonds

Insurers looking for protection against extreme natural catastrophes with the potential for generating massive losses on their balance sheet can resort to traditional reinsurance or capital markets via cat bonds.

A cat bond is sponsored, and not issued by an issuer. It is rather issued by a Special Purpose Vehicle created for this purpose therefore there is no counterparty risk exposure.

The proceeds from the investors' purchase are kept within the SPV and invested in safe collateral until the maturity (typically 3 years) of the cat bond.

At that point and in absence of catastrophe as defined in the bond's documentation in the meantime, the principal is entirely returned to investors.
However, if a catastrophe occurs over the period, the principal is not, or only partially, redeemed. Investors received a coupon whose level depends on the probability of occurrence of severe natural catastrophe events.

The coupon is usually a floating rate coupon composed of a Libor base rate + a spread, the latter being the risk premium paid by the transaction's sponsor for getting coverage against the risk of a given catastrophe.

Cat bonds offer an attractive risk premium relative to their expected loss (EL), partly due to the insurers' strong willingness to hedge the risk of a major and severe, but highly unlikely, catastrophe that could jeopardize their survival.

We can customize any mandate from a risk / reward standpoint depending on investor's EL risk appetite.

Finally, Cat Bonds offer a unique de-correlation feature compared to any other financial asset which makes it a very attractive and recommended investment.