Cat bond issuance hits new record - AON

Sept 5 Wed Sep 5, 2012 2:44pm EDT

Sept 5 (Reuters) - Sales of catastrophe bonds, which let reinsurers and insurers transfer risk to capital markets, have reached a four-year high and are expected to hit $6 billion by the end of the year, Aon Benfield said on Wednesday.

Cat bond issuance totaled nearly $6 billion in 2008 before falling sharply as the financial crisis struck, but the market for cat bonds has since improved as investors' memories of the crisis faded, soothed by double-digit returns for many ILS.

New issuance and outstanding volumes of cat bonds have seen a growth of $2 billion in the first quarter of 2012, compared with the same period in 2011, Aon's investment banking division, Aon Benfield Securities, said in a report.

A number of new companies backed by hedge funds have entered the market in recent months, lured by the promise of higher yields in the asset class.

Two new rated Bermuda-based reinsurers were launched in 2012 - PAC Re, and Dan Leob's Third Point Re, which formed in February 2012 with $785 million in capital.

"New capital flowing into the reinsurance sector is currently around $5 billion, with around $3 billion of that moving into the Insurance Linked Securities sector and the remainder into permanent capital facilities," Aon Benfield Securities Chief Executive Paul Schultz said.

In the current low yield environment, the higher yields available from investing in insurance risk are very attractive to capital market investors, said Schultz, who added that he expected annual issuance is of cat bonds to reach $6 billion.

The Aon Benfield ILS indices posted annual gains for the year concluding June 2012 - with the U.S. Hurricane and U.S. Earthquake Bond indices returning 7.60 percent and 4.38 percent, respectively, while the All Bond and BB rated Bond indices posted returns of 7.40 percent and 7.86 percent, respectively.

Since the first cat bond in 1996, ILS have been used to transfer a wide range of risks from natural catastrophes to life insurance, with the catastrophe bond market generating $44 billion of cumulative issuance.