Catastrophe Bonds (Cat Bonds):

Catastrophe Bonds, commonly called cat bonds, Risk-Linked Securities (RLS), and sometimes Event-Linked Securities (ELS), which are terms broader than Insurance-Linked Securities (ILS). Cat bonds transfer event risk from a Sponsor to Investors. Cat bonds are corporate bonds issued by a special purpose reinsurer or special purpose vehicle. Catastrophe Bonds typically carry a rating of BB or single B (though some are not rated), a 3 to 5 year maturity at issuance, and a quarterly or semi-annual floating rate coupon of Reference Rate + 2 to 20 percent. Depending on the bond, the Reference Rate is USD Libor, EUR Libor, or a US Treasury Money Market rate. Cat bonds are issued from a special purpose entity in order to make them insensitive to the bankruptcy of either the Sponsor or Investors, therefore creating a scalable, tradable framework for risk-transfer. Cat bonds were first created in the mid-to-late 1990’s in response to a severe property catastrophe insurance crisis in the U.S. caused by Hurricane Andrew (1992, Florida and Louisiana) and the Northridge Earthquake (1994, California). (move graph from insurance linked-securities to this definition)