Stock Market Reactions to the Issue of Cat Bonds

This paper is an attempt to evaluate the effect a cat bond issue has on the stock price of the issuing company by conducting an event study including cat bond issues done by publicly traded insurers and reinsurers. We find no significant price effect in either direction. This is consistent with the hypothesis that paid premiums are justified and total costs and benefits of laying off cat risk in the capital markets offset each other. The results should confirm potential issuers that issues at prices currently demanded by investors are not value destroying and that it is not justified that “there are investors, but not enough supply”. *University of Lausanne, Switzerland. Email: [email protected]. This paper was prepared as a final thesis for the Masters of Science in Banking and Finance (MBF) program of the University of Lausanne under the supervision of Professor François-Serge L’Habitant. I thank Morton Lane and Roger Beckwith of Lane Financial LLC, Kenilworth Ill., for providing me with data on cat bonds. Also, I wish to thank Chris Culp for his suggestions and comments and François-Serge L’Habitant for his support and patience. Stock Market Reactions to the Issue of Cat Bonds