This paper examines the market for insurance risk transfer via catastrophe bonds (CAT bonds), with a particular focus on the issuer's change in shareholder value. It addresses two gaps in the existing literature. Firstly, changes in risk composition over time in the CAT bond market are analysed, including an examination of innovative CAT bonds that cover risks such as cyber-attacks. Secondly, it examines how the sponsor's shareholder value reacts to the issuance of a CAT bond.
An event study evaluates the impact of CAT bond issuances on the sponsor's shareholder value. It analyses 118 bonds issued under Rule 144A since 2016. This is followed by a cross-sectional analysis.
Our findings challenge the prevailing view in the existing literature, indicating that CAT bond announcements are typically met with a negative market reaction. This can be explained by two factors: the high costs associated with these instruments, which often exceed the actuarial price of the risk, and the negative perception of CAT bonds among potential investors. The cross-sectional analysis reveals a negative impact of the relative issuance size, the size of the issuer and the risk multiple, as well as a positive influence of the number of issuances, the trigger selection and the issuer’s overall performance.
This study offers a novel perspective by identifying a negative market reaction to CAT bonds. It deepens our understanding of how issuance characteristics interact with market responses and provides insight into the complexities of CAT bond issuances.
