Cat bond issuance surpasses 2011 total after deal flurry

LONDON Tue Nov 6, 2012 8:21am EST

LONDON Nov 6 (Reuters) - Issuance of catastrophe bonds is set to bounce back sharply from last year's levels, fuelled by new capital as investors look to boost returns and avoid exposure to wavering economic growth in the United States and Europe.

Three new bonds in the past two weeks have generated a further $500 million of collateralized protection for reinsurers Swiss Re, Scor and Munich Re, bringing the current issuance total up to $5.2 billion so far in 2012.

This exceeds last year's total of $4.3 billion, making investor estimates of a $6-7 billion year-end issuance total more likely.

So-called catastrophe bonds allow insurers and reinsurers to pass on extreme risks, such as those related to earthquakes or hurricanes, to financial market investors, and are seen as an alternative to reinsurance.

Catastrophe bond issuers make regular interest payments to the bondholders, and, if no catastrophe-related losses are incurred, return the principal once the notes expire.

In the event of major catastrophe-related claims, however, the insurer uses the proceeds of the bond sale to absorb some of its losses.

Investors such as retirement schemes and hedge funds have pumped in an extra $3 billion in 2012 to the market - seeing the bonds as a good way of counterbalancing their exposure to regular stocks and bonds, which have seesawed violently since the 2008 financial crisis.

Cat bond issuance totaled just over $7 billion in 2007, and was at 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 financial crisis faded, soothed by eye-catching yields of between 5-7 percent for many cat bonds.

NEW BONDS

Swiss Re sold $200 million via two classes of risk to obtain coverage against North Atlantic hurricane and UK extreme mortality risk through its Mythen Re programme, the world's second biggest reinsurer said on Tuesday.

This is the first catastrophe bond to combine natural disaster risk and extreme mortality - the risk of a huge increase in deaths of life insurance policyholders, for example because of a pandemic.

"Swiss Re's innovative multi-peril bond has met strong investor interest which reflects the continued growing trust in Insurance-Linked Securities," Matthias Weber, Swiss Re's group chief underwriting officer, said in a statement.

The $120 million Class A notes have been classed B+ by rating agency Standard & Poor's and will cover North Atlantic hurricane and UK mortality risk, while the $80 million Class C notes - rated B- by S&P, will cover just North Atlantic hurricane risk.

The Class A notes complement another cat bond programme placed by Swiss Re called Vita Capital, which covers mortality risk.

Meanwhile, French reinsurer Scor completed its thirteenth cat bond deal to date via its Atlas Re special purpose vehicle - set up in Ireland to sell cat bonds to investors.

Atlas Re VII provides Scor with $60 million of coverage against U.S. hurricane and earthquakes via its Class A notes, and 130 million euros worth of coverage from European windstorms via its Class B notes.

The capital markets division of reinsurance broker Aon Benfield and BNP Paribas managed the transaction and the book on the deal, Scor said in a statement on Monday.

The Swiss Re and Scor deals follow a recent cat bond from Munich Re, which placed $75 million of risk last week.

Issuance is expected to increase in the last few months of the year after a seasonal lull in the second half of the year as the market sits out the June-to-November U.S. hurricane season.