Aon Benfield: Catastrophe Bond Market Strengthening

The catastrophe bond market is strengthening despite the fact Superstorm Sandy was the third most expensive hurricane in U.S. history.

The first quarter of 2013 began with Superstorm Sandy in the “rear view mirror,” according to a report released today by Aon Benfield Securities on the insurance-linked securities market.

Indeed, the market so far in this quarter is strengthening, with investors forced to pay premium prices for existing securities, according to Aon Benfield, which is the investment banking division of global reinsurance intermediary and capital advisor Aon Benfield.

The Aon Benfield report cited Successor V-F4 bonds. The bond was priced at 75 at the end of the year, 50 on Jan. 18 and ended the first quarter at 65 because investors remained cautious that any further increase in the Property Claims Service estimate of the current estimated cost of Sandy of $18.75 billion “would likely impact” the price of the security, Aon Benfield analysts said in the report.

The report also says new bonds issued this year encountered a market where there is excess capital available for investment in insurance-linked bonds, probably because yield-hungry investors are searching everywhere for higher returns than currently available in most parts of the market.

The report says there is heightened demand for new issuance, and existing bonds “saw strong mark-to-market gains throughout the first quarter.”

That was reflected in the fact new catastrophe bond issuance for the period reached $670 million, with a further $1.12 billion of bonds in the process of being marketed, according to the report.

The Aon Benfield All Bond Index increased by 0.9 percent — a significant increase given that U.S. hurricane seasonality typically reduces absolute spread levels during the first half of the year, the report indicates.

At the midpoint of the quarter, secondary market trading decreased as investors’ focus shifted to the primary issuances in the market, the report says.

As the first quarter ended, several cat bond transactions were in the marketing process, achieving similar success to those that had closed during the period.

“Given the strong demand for ILS solutions, we expect 2013 to be an active market for both primary issuance and secondary trading,” the report says.


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