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Cyber ‘Catastrophe Bonds’ Move Step Closer to Hitting Public Debt Markets

Can't wait to figure out which tail is wagging which dog here and what the systemic risks might look like.....

CDOs for cyber, anyone?

Cyber ‘Catastrophe Bonds’ Move Step Closer to Hitting Public Debt Markets

By Gautam Naik
November 12, 2023 at 8:30 AM ESTCyber catastrophe bonds may be about to move out of the shadows of private deal-making and into the public debt markets.

So-called cat bonds, which farm out hard-to-insure risks to capital market investors in exchange for double-digit returns, have typically been built around natural disasters such as hurricanes. But as the potential fallout of business-halting cyberattacks becomes too big to insure, issuers are seizing the moment. Beazley Plc, which owns specialist insurers across Europe and the US, is exploring a potential $100 million cyber cat bond, according to Artemis, a research firm specializing in insurance-linked securities. And Axis Capital is preparing to issue a $75 million cyber catastrophe bond, according to a preliminary offer document seen by Bloomberg. Spokespeople for Axis Capital and Beazley declined to comment on the deals. The wider market for cat bonds is likely to reach a record $40 billion this year. A lot of that growth has been fueled by the impact of climate change, as extreme weather shocks threaten to make insurers’ business models untenable. For that reason, some of the most active players in the cat bond market are reinsurers such as Swiss Re AG and Munich Re AG. Investors have been drawn to returns that trounce those of US Treasuries. This year, the Swiss Re Global Cat Bond Performance Index is up 18%, while the Bloomberg US Treasury Index has dropped about 1%. Issuers of cyber cat bonds want to protect themselves from financial losses that can follow a major cyberattack, including lost revenue, legal fees and regulatory fines. Read More: ICBC Hit by Cyberattack, Tells Clients to Reroute Trades

Insurance-linked securities “offer corporate boards and business owners a degree of comfort over their balance sheet resilience in the event of a larger cyber event,” according to a recent report co-authored by Kathleen Faries, chief executive officer of Artex Capital Solutions.

But with limited historical data to analyze, as well as increasingly sophisticated forms of cyber crime, investors face unusually high levels of risk....

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  • One risk with bonds is that they are "contracts" and those can be subject to interpretations by courts and/or governments.

    Look at the recent fiasco in Switzerland with the AT1 bonds. These are risky bonds that can be counted as bank Tier 1 capital in Europe. The risk is that they are wiped out in bankruptcy. So, when the Swiss Government forced UBS to rescue Credit Suisse, UBS "demanded" wipeout of Credit Suisse AT1 bonds. But there was no formal bankruptcy, only a rescue. The matter is still in the courts.

    Other European countries issued statements that this AT1 mess cannot happen there.

    Nevertheless, the European AT1 market was shaken on this action by the Swiss.

    Likewise, in the speculative CDS market, it isn't clear cut when the triggering event is.
  • Not for individual investors. Let the big dogs play in this space.
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