Insurance News

Catastrophe bond issues headed to 2007 highs

Posted on: August 26, 2010

(Reuters)—New issues of insurance catastrophe bonds should rapidly rebound to pre-financial-crisis highs as securities markets stabilize, insurance broker Aon Benfield said Monday.

Investors are showing sustained interest in so-called cat bonds, which enable insurance companies to transfer big risks, such as for hurricane or earthquake damage, to financial market investors, while their prices have also remained attractive for sponsors of the bonds, the broker said.

Aon Benfield said in its review of the insurance-linked securities (ILS) market over the last year that it expected a rise in the number of ILS transactions and deal sizes in the coming months.

“We expect catastrophe bond issuance to increase and quickly approach the peak levels witnessed in 2007,” it said.

Cat bond issuance totaled just over $7 billion in the year to June 30, 2007, and was at nearly $6 billion in 2008 before falling sharply as the financial crisis struck.

The market for cat bonds has since improved as investors’ memories of the financial crisis faded, soothed by double-digit returns for many ILS securities.

However, those surging returns are unlikely to be sustainable in the months ahead, Aon Benfield warned on Monday.

“Because the extraordinary conditions witnessed during the recent market recovery are unlikely to be repeated, we expect annual returns will ease toward historical averages over the next several quarters,” it said.

Aon Benfield joined the world’s two biggest reinsurers, Munich Reinsurance Co. and Swiss Reinsurance Co. Ltd., in predicting investors would need to diversify their portfolios after stocking up on U.S. hurricane bonds earlier this year.

If investors are flexible on prices, it may encourage sponsors to choose the ILS deals over traditional reinsurance, where costs are lower, Aon Benfield said.

“We do expect that investors will be willing to invest in non-U.S. hurricane deals at lower spreads to encourage issuance in these perils to balance out the large amount of U.S. hurricane-exposed bonds in their portfolios,” said Paul Schultz, president of Aon Benfield Securities, which sets up cat bonds for insurance and reinsurance companies.

There have been 20 new catastrophe bond issues totaling $4.6 billion in the 12 months to June 30, up from 11 issues totaling $1.7 billion in the previous period, Aon Benfield said.

Half of the $4.6 billion was issued in the second quarter of 2010 alone and was mostly related to the transfer of U.S. hurricane risk, the broker said.

New insurance capital rules in Europe—called Solvency II and due to come into force in 2013—will help boost issuance of insurance-linked securities for non-U.S. risks, the market still faced some hurdles, Aon Benfield said.

“While we expect that the market will continue to grow this year and beyond, the full market potential continues to be constrained by an extremely competitive traditional reinsurance market,” the broker said.

Copyright 2010 Reuters Limited.

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