A Catastrophe Bond (Cat Bond) is an instrument that transfers insurance risk to the capital markets. Cat Bonds generate higher returns for investors, but carry the risk of a partial or full loss of principal in the event of a catastrophe. If a catastrophic event does not occur, the investor receives the coupon payments for the term of the bond and receives the full principal amount at maturity. If a catastrophic event occurs, the investor stands to lose future interest payments and principal at maturity.
Eagle Accounting does not have a specific processing security type for Cat Bonds, but Eagle’s core fixed income functionality can easily be leveraged to handle these investments.
Eagle recommends modeling Cat Bonds similar to standard bonds, which are single security master records. These should be setup and viewed using Issue Viewer > Add > Fixed Income > Long Term Debt. Security Reference Manager clients should setup Fixed to Float Bonds using Add > Fixed Income > Long Term Debt in SRM. Below are specific reference data configurations.
Processing Security Type: DBIBFD
Coupon: zero (to signify a variable or floating rate bond)
Coupon Type Code: Variable or Floating
Day Count Basis: ACT/360
Business Day Convention: based on bond terms
Coupon Day of Month: required if using a Business Day Convention; set to the expected date for coupon payments
If first coupon payment is different than overall payment schedule (i.e. first payment is the 10th due to a weekend, but most payments will be the 8th), set to the date of most payments (the 8th)
This will ensure that remaining coupon payment dates are not scheduled based on the first payment date
Payment Frequency = based on bond terms
Issue Price = 100
Maturity Price = 100
There are no specific settings for entities trading Cat Bonds modeled as bonds. Should a Cat Bond be purchased at a price other than par, Eagle’s core fixed income processing will amortize the security to par at maturity based on the entity-level Primary Amortization/Accretion Rule.
Once all reference data has been configured, the Book Trade panel under the Trade tab can be used to process Cat Bond transactions.
Trades should be processed like standard bond trades
A Principal value is calculated based on the Par Value/Current Face and trade Price
Amortization Yield is also calculated at trade time
In case of a catastrophe, the principal loss should be processed by selling off the position at a price of zero (or 0.000001). This will create a 100% realized loss. In the event of a partial principal loss, the appropriate portion of the position should be sold to represent the partial loss.
In the event of a catastrophe the, user can update the variable rate to zero or a reduced rate to reflect the reduced coupon payment. If this occurs in the middle of a payment period, the user may need to rollback earnings to the beginning of the period to properly accrue at the adjusted rate. Another alternative is to place the security into default, which will shut off the income and amortization streams.
Once a Cat Bond position is established it will follow core Eagle Accounting processes.
Cat Bonds are captured by Eagle’s core maturity process. Maturities are triggered using the Global > Global Process Center > Expirations > Mature panel.
Set Maturity Processing Date equal to Maturity Date of the Cat Bonds
To settle the principal and interest cash from maturity, use Global Process Center > Settlements > Contract Cash
Cat Bonds should be priced daily using a par-based price. Eagle Accounting calculates the security’s value by using the formula below:
Market value = Shares * Clean Unit Price * Price Multiplier * Quantity Scale
Almost all reports in Eagle leverage data from Data Management, which is populated by the S2P process. This will be scheduled as part of the daily workflow, but can also be triggered manually as described in the Accounting section.
The S2P process creates a single row for each Cat Bond in the POSITION, POSITION_DETAIL, TRADE, and CASH_ACTIVITY tables. The MARKET_VALUE_INCOME column captures the total market value, inclusive of price fluctuations and period-to-date accruals payable or receivable.
Eagle has a core set of accounting reports that can be used to review Cat Bond information. These are designed to support the daily operational workflow for business users, allowing Grid Reports to be easily exported to Excel and customized to provide additional details as needed. Advanced Reports are intended to be client-facing and do not provide the same level of customization.
The performance toolkit has full functionality to calculate market value-based performance for Cat Bonds using data supplied by the S2P process. Risk and performance attribution features are available to analyze Cat Bond performance.
Eagle supports loading Cat Bond SMFs and trades through standard Message Center streams. The SMF must be loaded prior to the trade (trades do not spawn SMFs). Refer to https://eagledocs.atlassian.net/wiki/spaces/GENERICINTER for more information.