Cat bond issues up: Moody’s

Catastrophe-link securities were up nearly 50% in 2003, according to rating agency Moody’s Investors Service.
The rater says cat bonds grew from the US$1 billion average over the past few years to US$1.5 billion in 2003. This is based on 13 transactions.
Cat bonds are risk-linked securities the risk of natural catastrophe losses in excess of a specific threshold is passed to investors by the bond’s issuer, an insurance or reinsurance company, or large corporation. They are can be used to cover such large-scale risks as earthquakes and hurricanes.
The success rate for investors in such bonds has been optimal, Moody’s notes. We note that there has yet to be a loss to investors in cat bonds despite the fairly high number of deals rated over a period of a little more than seven years,” says Moody’s analyst Rodrigo Araya. Since 1996, Moody’s has rated 41 cat bonds valued at US$6.2 billion.
Araya sees cat bonds as a “win-win” situation. “Sponsors benefit from the creation of alternative sources of risk financing that brings increased coverage capacity and more predictable prices because the capital markets have considerably larger capacity and greater scope for economic diversification than insurers and reinsurance companies,” he says. Investors get portfolio diversity, and overall society is aided with the spread of losses from large catastrophes.