TAILIEUCHUNG - Cat Bonds Demystified RMS Guide to the Asset Class

Catastrophe (cat) bonds have attracted investor interest as one of the few asset classes not correlated to the global financial markets. Cat bonds were first issued in the aftermath of Hurricane Andrew and the Northridge Earthquake in the mid-1990s and the market has grown robustly since. They are the best-known example of a broader class of insurance-linked securities (ILS). Cat bonds are the most suitable ILS instrument for novice investors because they are 1) rated and 2) freely tradable by qualified investors. They are also an effective way to enhance the risk-return profile of an investment portfolio. In the current low interest rate. | Cat Bonds Demystified RMS Guide to the Asset Class INTRODUCTION Catastrophe cat bonds have attracted investor interest as one of the few asset classes not correlated to the global financial markets. Cat bonds were first issued in the aftermath of Hurricane Andrew and the Northridge Earthquake in the mid-1990s and the market has grown robustly since. They are the best-known example of a broader class of insurance-linked securities ILS . Cat bonds are the most suitable ILS instrument for novice investors because they are 1 rated and 2 freely tradable by qualified investors. They are also an effective way to enhance the risk-return profile of an investment portfolio. In the current low interest rate environment the value of cash is being eroded by inflation and government bonds offer return-free risk. Investors looking for viable uncorrelated alternatives to equities who typically turn to investments in infrastructure or agricultural land will find that catastrophe bonds fit well into an alternative strategy. Relative to other alternative investments cat bonds offer both low correlation to the market and higher yields for the same level of risk as can be seen in the Table 1. Many institutional investors are already successfully including ILS in their portfolios either through outsourcing to dedicated funds or investing directly. This guide explores the main features and considerations of a cat bond investment including different investment routes and key questions asked by new investors in the space. Table 1 Comparison of historical returns and volatility since 2002 Index Historical Annual Returns Volatility Swiss Re Cat Bond Total Return Index Dow Jones Credit Suisse Hedge Fund Index S P 500 Index Dow Jones Corporate Bond Index Private Equity Total Return Index 2012 Risk Management Solutions 1 WHAT ARE CAT BONDS Cat bonds are a standardized method of transferring insurance risk to the capital markets. The proceeds

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