(Reuters) – A private catastrophe bond has been listed on the Channel Islands Stock Exchange, the first time such a deal has been made fully tradable in the secondary market.
The California Earthquake Authority (CEA) and reinsurance firm Solidum Partners set up a special purpose vehicle (SPV) in Guernsey to issue cat bond notes through a transformer reinsurance contract.
The SPV – called Solidum Re Eiger IC Limited – provides $52 million of earthquake protection for the CEA in the state via a privately placed catastrophe bond.
Catastrophe bonds are used by the insurance industry to transfer extreme risks, such as those for earthquakes or hurricanes, to capital market investors. They receive a handsome yield in return for agreeing to cover damages they consider unlikely.
Private cat bonds – sometimes called collateralised reinsurance contracts – are similar in structure to their publicly traded peers, with capital set aside and pledged as collateral against the risks they cover.
Private placement allow the issuer to chose which investors can buy the notes, and they have traditionally been bought by investors to hold until maturity. In this case, however, investors will be able to trade the notes in the secondary market if an earthquake strikes California.
The private securitisation is the first cat bond to be listed on any exchange in the world, Bedell Cristin, the law firm behind the transaction, said in a statement.
The CEA, privately owned but publically funded, currently buys about $3.5 billion of reinsurance against earthquake risks each year.
It has sponsored cat bonds worth $600 million via its Embarcadero Re vehicle and transferred another $52 million of quake risk through Solidum Re Eiger IC Limited.
Solidum vehicles have issued over $100 million of private cat bond notes to date, said Cedric Edmonds, partner at Solidum Partners and director of Solidum Re Eiger IC Limited.
“Solidum was the first entity to issue private cat bonds and is to date the only entity to have (its) private placement cat-linked notes traded,” he said in a statement.