Filed Under:Risk, Enterprise Risk Management

Cat Bond Sales Near $6B in 2012 Despite Sandy Loss Threat

Sales this year of new catastrophe bonds have been the second highest since the market began, despite potential losses for investors as a result of superstorm Sandy, Swiss Resaid on Thursday.

Only a small subset of catastrophe bonds may be affected by the fierce storm that hit the eastern United States in October.

More than 50 percent of outstanding cat bonds are exposed to northeast U.S. hurricane risk, representing $8.5 billion in coverage, but Sandy did not prompt investors to sell their holdings, the world's No.2 reinsurer said.

Insurers and reinsurers use cat bonds to transfer some potential losses from natural disasters to capital markets investors, who receive a high rate of interest but risk losing all or part of their principal if a catastrophe occurs.

Around 20 percent of bonds with higher levels of northeast U.S. hurricane exposure traded slightly below face value in the few weeks after Sandy made landfall, said Martin Bisping, head of non-life risk transformation at Swiss Re. Of those, only one-third are currently trading 10-25 percent below par.

Sandy, which struck the Northeast region on Oct. 29, is expected to be the second-costliest catastrophe in U.S. history, with insured loss estimates as high as $25 billion. The most expensive natural disaster was Hurricane Katrina in 2005. 

CAT BOND GROWTH

Cat bond issuance has reached $5.8 billion this year thanks to a growing perception that they are insulated from mainstream financial and economic shocks.

That is an increase of $2.5 billion from last year and is more than in any year bar 2007, when issuance reached over $7 billion before falling sharply as the financial crisis struck.

Some 25 new bonds were sold. Their total volume exceeded redemptions, pushing the size of the market to $16 billion.

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.

Additionally, "a large portion (of cat bond issuance) is providing capacity for the reinsurance companies so they can write more business by sharing their peak risks," Bisping said.

Cat bonds are likely to be issued in future covering potential losses from earthquakes and typhoons in new regions such as Australia and China, Swiss Re said.

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