Cat bond sales finish 2012 near record high

LONDON Wed Jan 2, 2013 11:33am EST

LONDON Jan 2 (Reuters) - Two catastrophe bonds placed late in December boosted sales of such transactions to more than $6 billion in 2012, the second highest annual total in the market's history.

The two bonds, which will protect insurers Zurich and AIG against losses associated with potential natural disasters in the United States and Canada, were listed on the Bermuda Stock Exchange (BSX) on December 27 and 28.

They bring total issuance of 'cat bonds' to $6.3 billion in 2012 - nearing the highest ever total of $7 billion, hit in 2007 before sales fell sharply as the financial crisis struck.

The market for cat bonds has since improved, with investors soothed by changes to the instruments' structure, the double-digit returns they offer, and a growing perception they are insulated from mainstream financial and economic shocks.

Insurers have used catastrophe bonds since the 1990s to manage their exposure to natural disasters by transferring potential losses to capital markets investors. Buyers receive a high rate of interest but risk losing all or part of their principal if a natural disaster occurs.

The bond issued by Bermuda-based Compass Re Ltd Series 2012-1 will cover the National Union Fire Insurance Co. of Pittsburgh, a unit of AIG's Chartis, against U.S. hurricane and earthquake risk, brokers with knowledge of the transaction said.

The $400 million deal brings Chartis's total coverage via catastrophe bonds to $1.85 billion. It had previously sold a bond via Compass Re Ltd in 2011 and issued another deal through Lodestone Re Ltd in 2010.

European insurer Zurich's new bond, sold via Lakeside Re III Ltd, will provide $270 million of coverage against potential earthquake damage claims in California and the Pacific Northwest, rating agency Standard & Poor's said in a report.

The transaction will replace Lakeside Re II Ltd, which matured at the end of 2012.

Lakeside Re III Ltd was rated B+ by S&P and pricing closed at 800 basis points over U.S. money market fund yields.

Munich Re and Swiss Re helped structure and sell the bond.

Cat bonds have become less expensive for insurers to issue, and are now seen as a direct alternative to traditional reinsurance for natural disaster coverage.

Cat bonds are likely to be issued in future covering potential losses from earthquakes and typhoons in new regions such as Australia and China, according to Swiss Re, the world's No.2 reinsurer.