Understanding Catastrophe Bonds

Catastrophe bonds occupy an unusual position within fixed income. They are bonds in legal form and generate an income stream, yet the risk investors are being paid to assume has relatively little to do with the credit cycle that drives most conventional bond portfolios. Instead, investors provide collateralised insurance capacity against specified events. In return, they receive an insurance premium alongside the income earned on the collateral, while accepting the possibility of losing principal if a covered event breaches the bond’s contractual loss threshold.