The securities that lmn insurance company issued to borrow money from investors are called catastrophe bonds or insurance-linked securities (ILS). These bonds are a type of financial instrument that allows insurance companies to transfer the risk of catastrophic events, such as hurricanes, to investors.
Here's a step-by-step explanation of how these securities work:
1. lmn insurance company wants to protect itself from potential losses due to hurricanes on the gulf coast, so they decide to issue catastrophe bonds.
2. These bonds are sold to investors who are willing to take on the risk of potential hurricane losses in exchange for interest payments.
3. The bonds have a specified level of hurricane losses that, if exceeded, triggers a partial repayment by lmn insurance company.
4. If hurricane losses do not exceed the specified level, lmn insurance company will repay the borrowed money with interest as agreed upon.
5. However, if hurricane losses exceed the specified level, lmn insurance company will use the extra money obtained from the partial repayment to fund the losses.
6. In this way, the investors who bought the catastrophe bonds bear a portion of the risk associated with hurricanes, while lmn insurance company obtains additional funds to cover potential losses.
In summary, the securities that lmn insurance company issued are called catastrophe bonds or insurance-linked securities (ILS). These bonds allow lmn to borrow money from investors and promise to repay it with interest if hurricane losses do not exceed a specified level. If losses exceed that level, lmn will repay less than it borrowed and use the extra money to fund hurricane losses.