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catastrophe bond

A derivative debt investment vehicle issued by insurers and reinsurers designed to raise investor capital to cover catastrophic loss events. "Cat" bonds are issued to cover either a specifically identified event (e.g., a Japanese earthquake) or the possibility of a certain magnitude of loss associated with hurricane activity in a particular geographic location (e.g., the Texas Gulf coast). Unlike traditional reinsurance that is highly leveraged (i.e., reinsurance limits sold represent many multiples of a reinsurer's capital), "cat" bonds carry no such leverage since their value is equal to the amount of insurance limits for sale.


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