A MASSAGE

INTRODUCTION
CAT BOND means Catastrophe Bonds Financial instrument used to transfer natural catastrophes risks A natural catastrophe is an extremely largescale disaster, a horrible event.

Earthquakes Hurricanes Floods Storms Tsunamis etc

Insurance & reinsurance companies issue CAT

Bonds

INTRODUCTION
Cat bonds are likely to be issued in covering potential losses from natural disasters First time issued in mid 1994 by Hannover Re

The market grew to $12 billion of issuance per year for the 19982001 period

Over $2 billion per year following 9-11

After Hurricane Katrina (2006),issuance doubled $4Billion

Till 2012 at an average $ 8Billion Used in USA and Japan Planning to issue in new regions such as Mexico, Australia and China (Swiss Re said)

SPONSORS / ISSUERS
USAA Liberty Mutual Allianz

Munich Re Germany ($31.4 billion Gross Written Premiums) Swiss Re Switzerland ($30.3 billion) Berkshire Hathaway / General Re USA Hannover Re Germany ($12 billion) SCOR France ($6.9 billion) Reinsurance Group of America USA ($5.7 billion) Transamerica Re USA ($4.2 billion) Everest Re Bermuda ($4.0 billion) Partner Re Bermuda ($3.8 billion) Axis Capital Bermuda XL Re Bermuda ($3.4 billion) (part of XL Group)

TOP INSURANCE COMPANIES

TOP REINSURANCE COMPANIES

ORIGIN
Catastrophe bonds came to prominence in the early 1990s After natural disasters like

Northridge earthquake in California Hurricane Andrew in Florida

Losses nearly $30 billion to insurers and reinsurers Severely stressed the firms within insurance industry to meet their financial obligations So to avoid natural catastrophe risks they came with the idea of CAT BONDS

DEFINITION

A high-yield debt instrument that is usually

insurance linked and meant to raise money in case of a catastrophe such as a hurricane or
earthquake. It has a special condition that states that if the issuer suffers a loss from a particular predefined catastrophe, then the issuer's obligation to pay interest and /or repay the principal is either deferred or completely forgiven.

DEFINITION
Insurers and reinsurers use cat bonds to transfer some potential losses from natural disasters to capital markets investors, who receive a high rate of interest but risk losing all or part of their principal if a catastrophe occurs.

STRUCTURE

PROPERTIES

Highly paid debt-instrument No correlation with Market & other securities Trigger depends on Catastrophe event Most cat bonds are rated BB and B category Chances of trigger 1% Principle repayment after Maturity, IF Time period 3-5 years Currently returns @ 9% in US

TRIGGER TYPES
1.

Sponsor & investment bank choose the structure INDEMNITY:

triggered by the issuer's actual losses Eg; losses more than $500 million layer , bond is triggered

2.

MODELED LOSS:

Triggered on the basis of exposure to loss Measured through catastrophe modeling software Trigger of bond depends on over loss to insurance industry But if the loss go beyond a specified threshold
instead of being based on any claims trigger is indexed to the PARAMETERS of natural hazard caused by nature Eg : wind speed greater than X METER/ SEC Ground acceleration above 6.5 on Rickter Scale

3.

INDEXED TO INDUSTRY LOSS :

o o

4.

PARAMETRIC

MARKET PARTICIPENTS
1.

Cat bond sponsors

USAA, Swiss Re, Munich Re, Liberty Mutual, Hannover Re, Allianz, and Tokyo Marine Nichido

2.

ALL catastrophe bond investors have been institutional investors

specialized catastrophe bond funds, hedge funds, investment advisors (money managers), life insurers, reinsurers, pension funds, and others.

3.

Individual investors have generally purchased such securities through

specialized funds.

Investment banks and Inter Dealer Brokers that are active in the trading and Issuance of catastrophe bonds
Aon Benfield Securities, Inc., BNP Paribas, Tullett Prebon, Swiss Re Capital Markets, GC Securities (a division of MMC Securities Corp. and affiliate of Guy Carpenter), Goldman Sachs, Munich Re Capital Markets, Barclays Capital, Deutsche Bank, & JP Morgan

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