Catastrophe bonds, Cat bonds
are debt instruments that allow insurance companies to receive additional capital in case of certain events such as hurricanes, tornadoes, droughts, earthquakes, etc. For such bonds, if one of the events listed above occurs, the investor stops receiving cash flow or receives it in a smaller amount, and the issuer has additional funds to finance payments for undesirable events.
Here are some examples of catastrophe bonds: 2001 Cat Re, FRN 8jan2024, USD
, Sanders Re, FRN 7apr2022, USD
, La Vie Re, FRN 6oct2023, USD
The traditional investors in catastrophic bonds are institutional investors, mainly hedge funds. Issuers are usually represented by insurance companies through special SPVs, also called SPRVs (Special Purpose Reinsurance Company). The interest rate is usually higher than classic bonds, because there is no 100% protection of the investor’s capital.
The instrument is interesting from the point of view of portfolio diversification, since local natural disasters often do not correlate with movements in financial markets.