Record level of ’12 cat bonds

The level of catastrophe bonds outstanding at the end of 2012 reached a record $16.54 billion, according to a report by Aon Benfield Securities. 

The report, “Insurance-Linked Securities, Fourth Quarter 2012 Update,” said new catastrophe bonds in 2012 totalled $6.25 billion, an increase of more than 35 per cent from 2011 and the highest issuance volume since 2007.  

“Fourth quarter 2012 ILS issuance volumes were strong, adding to the consistently impressive quarterly performances for the year as a whole,” said Paul Schultz, CEO of Aon Benfield Securities. 

New issuance continued to be driven by US risks, but investors were also provided with diversity from Mexico, Europe and mortality risks. A number of transactions were successfully upsized as sponsors benefitted from investors’ strong capital inflows, the report said.  

Strong issuance volumes are expected to continue throughout 2013, as a solid pipeline is anticipated for the first half of this year. This is again driven by US risks with sponsors looking to secure capacity ahead of hurricane season. 

Tropical storm Sandy which hit New Jersey on 29 October exhibited both tropical cyclone and winter storm characteristics and was one of the most damaging storms in US history. The economic losses resulting from Sandy will be at least $62 billion Aon Benfield estimated, but insured loss estimates are significantly lower. In particular flood losses are still difficult to determine.  

Most flood losses are covered by the taxpayer funded National Flood Insurance Program, which still has a deficit of $17 billion from Hurricane Katrina in 2005. The NFIP is expected to increase its debt cap to US$30.45 billion as a result of Sandy. 

“While legislation was extended for five years when the program was slated to expire (unless further extensions were passed), Congress had already asked for a 10-year payback plan to be developed for the current debt outstanding. With only US$3.5 billion of annual premium, paying back the original US$17 billion would already mean significant price increases for policyholders,” the report said. 

In the Caribbean Sandy made landfall as a Category 1 hurricane in Jamaica and a Category 2 hurricane in Cuba before crossing the Bahamas. The total economic losses in the region are estimated to be US$2.5 billion. Yet insured losses were much lower at only $100 million in the Bahamas. 

Sandy has led to broad price decreases, with US hurricane bonds falling by 4.1 per cent and US multi-peril bonds dropping by 7.9 per cent between 19 October and 16 November. By the end of the year, secondary prices for US hurricane bonds had decreased 1.9 per cent and US multi-peril bonds had decreased 3.8 per cent since 19 October, but no bonds had been impaired due to Sandy. 

Secondary trading in the fourth quarter of 2012 has historically been active as investors rebalanced their portfolios, the report said. “[In 2012] investors had ample capital to take down all the primary market issuances without having to make major changes.” 

More market participants were looking to purchase than sell bonds in the fourth quarter of 2012, except for short-dated US earthquake-exposed transactions in which there were more sellers than buyers.  

“As the quarter closed, investors had excess capacity and were looking forward to another active year in 2013,” the report concluded.