Cincinnati Insurance sells $61 mln U.S. catastrophe bond

LONDON Mon Jan 28, 2013 11:14am EST

LONDON Jan 28 (Reuters) - The Cincinnati Insurance Company, a subsidiary of Cincinnati Financial Corporation, has sold a catastrophe bond to help cover itself against any major earthquakes or storms hitting the mid-west United States this year, said consultant Towers Watson, which helped with the issue.

Towers Watson Capital Markets (TWCM), a subsidiary of Towers Watson, raised $61.2 million from the cat bond notes called Skyline Re 2013-1, the firm said in a statement on Monday.

The bond will protect the company from earthquake claims this year from tremors occurring in what is known as the "New Madrid seismic zone", as well as storm losses.

The New Madrid seismic zone is a major earthquake-prone area in the southern and mid-western United States where three of the largest North American earthquakes in recorded history occurred in the 19th century, according to the U.S. Geological Survey website.

It is usually the big reinsurance companies, such as Swiss Re and Munich Re, or primary insurance companies such as Chubb Corporation and Allianz that issue catastrophe bonds to transfer major risks on their books to free up capital to underwrite new business.

Cat bond sales burgeoned last year thanks to a growing perception that they are insulated from mainstream financial and economic shocks.

But supply has not kept up with demand from investors, prompting an increase in private bond placements, which are regarded as carrying a higher risk for the investor.

Skyline Re is structured as an "indemnity bond", which means the performance of the instrument depends on the actual loss of the Cincinnati Insurance Company, rather than using data from a aggregator firm, such as Property Claims Services, to define whether an event qualifies under the terms of the deal or not.