Providing multi-tranche catastrophe bonds gives large re/insurers the risk:return profiles they are most comfortable with, as Cory Anger, global head of ILS Structuring at GC Securities*, describes.
Multiple tranches of catastrophe bonds offered in a single offering have been utilised by cedants (sponsors) of catastrophe bonds since inception of the insurance-linked securities (ILS) marketplace. The two primary purposes for the use of multi-tranche catastrophe bonds by sponsors include:
- Obtaining different types of protection, for example, per occurrence versus aggregate, single peril versus multi-peril coverage, first event versus subsequent event coverage, differing risk period lengths; and/or
- Achieving best execution from capital markets investors.
Table 1 and 2 (see page 12) highlight the usage of single tranche 144A catastrophe bond offerings versus multiple tranche 144A catastrophe bond offerings since 2008.
Large insurers and reinsurers are the most likely users of multi-tranche catastrophe bonds as other sponsors typically do not have enough protection needs or diversification required from capital markets capacity sources to warrant multiple catastrophe bond tranches. Additionally, as deal sizes and overall volume have increased since 2008, sponsors have increased the type of offerings they are bringing to capital markets investors.
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