Cat bond total loss
The outcome in which the covered event reaches the tranche's exhaustion point: investors lose their entire principal, which the collateral passes on to the sponsor.
A cat bond puts its issuance proceeds into collateral and repays investors only what was not needed to indemnify the sponsor. When the loss measured by the trigger exceeds the exhaustion point, the entire collateral goes to the sponsor and bondholders' principal drops to zero: that is a total loss. It is not established on the day of the catastrophe, because an indemnity trigger requires the sponsor's claims to develop, which the extension period gives time for. For the market the event is rare but defining: it proves the risk transfer is real, which is what the spread pays for, and it tests the documentation, the calculation agent and investors' patience. A total loss therefore reads as much as a test of the contractual machinery as a financial loss.
Kamp Re 2005, issued for Zurich for 190 million dollars against US hurricanes and earthquakes, became the first total loss in cat bond history after Hurricane Katrina struck on August 29, 2005: claims development eventually exhausted the tranche, and bondholders lost all of their principal.
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