Contingent capital: A tale of two valuations

Abstract This study investigates the valuation gap between buyers and sellers of insurers' contingent capital, driven by asymmetric exposures to tax benefits, capital injections, and bankruptcy costs. We develop a novel Twin‐Tree Model with Jumps ( TTMJ ) that models the insurer's asset value dynamics by incorporating catastrophe risk, insolvency risk, and contractual features observed in practice. Using U.S. earthquake loss data and a representative real‐world contract, we show that early exercise and net‐worth provisions significantly affect contract tradability by expanding the range of mutually acceptable prices. Our results provide new insights into reconciling valuation asymmetries and offer guidance for designing contingent capital instruments that enhance insurers' financial resilience under catastrophe risk.