What is an Act of God bond?

An Act of God bond is a bond issued by an insurance company, whereby the principal and interest compensation (coupon) are linked to the insurance company's losses due to natural disasters. In the event of such a disaster, the issuer, or the issuing insurance company, can postpone, reduce, or even entirely omit the payment to bondholders.

These bonds are often used as financial cover for insurance companies against major natural disasters.