LONDON Nov 14 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
"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.,"
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