Do Cat Bonds Bring Value to the Insurance Firm's Shareholders? An Event Study Analysis

Abstract

Does a catastrophe bond issue increase the insurance firm value to shareholders? By issuing such bonds, insurance companies that are exposed to weather claims, can share their risk with investors, managing the corporate risk. The academic literature argues that hedging activities can increase a firm’s value to shareholders, by reducing costs associated with agency conflicts, financial distress, taxes, external financing. The paper provide an event study and a cross-sectional analysis to (1) determine the impact of the cat bond issue, and (2) to identify the determinants of the event impact. Consistent with previous studies, no general market reaction is found; nevertheless, the factor analysis highlights the negative impact of the cat bond size on the firm’s value, and a positive impact of the insurance firm’s securitization experience. Our findings offer empirical evidence on new data that were collected recently, and offer an original view on the role of cat bonds.

Keywords: cat bonds, event study, firm’s value, insurance, reinsurance, risk management

JEL Classification: G14, G15, G22, G32