Catastrophe Equity Put (CatEPut)

What do you get when you combine a feline friend with a weapon of war that heaves rocks long distances?

A CatEPut.

We’re sorry to our friends at PETA. And to...pretty much everyone else.

In reality, CatEPut is an insurance term that's short for Catastrophe Equity Put. The business of insurance is unforgiving in the case of a major catastrophe or significant event that fuels a large stream of claims all at once.

Insurance companies collect premiums and then set money aside to meet claims as they come in. Good budgeting and forecasting allow a company to know exactly how much money they'll have available. In the event that they might not have money to meet all of the claims in the future, they have a few different ways to manage the threat of illiquidity.

A CatEPut allows insurance companies to sell their own stock at a specific price if shares fall below a certain level. By selling their stock, they're able to access the capital needed to fulfill insurance claims, and ensure that policyholders receive their settlements on time.

Naturally, this strategy offers much-needed liquidity to the company. Unfortunately, the decision to exercise these put options will dilute ownership by calling upon capital from the holders of the buyers of those puts.