Sandy to have muted effect on cat bonds -broker

LONDON Wed Nov 14, 2012 8:13am EST

LONDON Nov 14 (Reuters) - The scope and scale of superstorm Sandy is not enough to trigger losses for catastrophe bond investors, and won't deter new issuance, Willis Capital Markets & Advisory (WCMA) said in a report.

Based on current estimations from disaster risk modelling companies and insurers of $10-20 million in insured losses, the impact of the storm which slammed into the U.S. east coast on Oct. 30 will be muted, said WCMA, part of reinsurance broker Willis.

"While these forecast potential losses represent staggeringly large numbers, Sandy will likely barely dent the reinsurance programs of companies with large market shares in the affected region," the broker said.

Catastrophe bonds transfer insurers' potential losses from the worst natural disasters to capital markets investors, freeing up capital to underwrite new insurance business, and are triggered only rarely.

Bondholders receive relatively generous coupon payments but risk losing all or part of their principal if a catastrophe such as a hurricane or earthquake occurs.

Some 72 percent of catastrophe bonds have some exposure to U.S. hurricanes, WCMA said. But "fortunately for investors, the scope and scale of the storm makes it unlikely that any bonds will be triggered solely by Sandy".

Credit rating agency Standard & Poor's put a cat bond sold by Residential Re to cover insurer USAA against losses from natural disasters on Creditwatch on Nov. 6, citing Sandy, but other bonds are seen at little risk.

The Res Re deal is based on aggregate losses, meaning it will pay out if enough losses - including those from Sandy - are accumulated on an annual basis to reach a pre-agreed sum. .

"Hurricane Sandy will have little if any impact on new issue pricing in the cat bond market, especially outside the U.S.," said WCMA.

WCMA maintained its forecast of total 2012 issuance of around $5.5-$6 billion, noting that spreads in the sector have tightened as a result of strong investor demand from investors seeking yield and diversification from mainstream markets.

Cat bonds are typically rated below investment grade.

From 2007 to 2012, investors have seen an average annual return of 8.32 percent from cat bonds, compared to 5.84 percent on three-to-five-year U.S. treasury notes, according to data from reinsurance broker Aon Benfield.

- To see the full report from WCMA, and for more details on cat bond transactions, see the Thomson Reuters Insurance Linked Securities Community

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