Interview with Jean-Laurent Bonnafé, Director and Chief Executive Officer of BNP Paribas - by...
The proceeds of the issue are intended to finance additional multi-year reinsurance coverage for Hartford Fire Insurance Company (HFIC), subsidiary of HFSG (one of the most important companies of assurance and financial services of the United States).
According to the model, the bonds are broken down in two classes:
- Class A bonds will generate up to $180 million in the event of severe hurricanes in the United States bet-ween now and 17 November 2010. Standard & Poor's has given the bonds BB+ ratings.
- Class G bonds will generate a total of up to $67.5 million in the event of hurricanes, earthquakes, torna-does, or hailstorms in the United States in the two years to 31 December 2008. Standard & Poor's has given the bonds B ratings.
Mark Azzopardi, Head of Insurance & Pensions within Fixed Income at BNP Paribas said: "This is the third successful series of catastrophe bond transactions which we have closed for Foundation Re companies in the last two years, taking the total capacity in force to $600m. This series of transactions demonstrates how significant, long-term, fixed-price capacity can be sourced effectively from the capital markets".
The catastrophe bonds
Natural disasters are not only at the origin of humanitarian dramas, but can also cause great economic losses, which can notably damage insurance companies. In this context, the insurances sector created the system of the catastrophe bonds, a merger of the insurance and the finance technique, which allows relocating the risk linked to natural disasters on the capital market.
The Chicago Board of Trade launched the first catastrophe bonds. The system aims to protecting the insurance companies against the lack of liquid assets which threatens the insurance companies in case of natural disaster.
Both the investors and the insurances take advantages from the catastrophe bonds. The principle is simple: if a disaster arises, the issuer of the bond can be refunded of a part or the totality of the nominal value, according to the degree of the accident, which allows reducing its financial balance risks. On the other hand, the investor receives interests which are from 3 to 4 % over the market average. In addition, the probability to lose the money invested on catastrophe bonds is estimated on average of 0,7%.
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