Annual cat bond issues hit US$6.7 billion, with coverages including U.S. hurricane, Canadian earthquake

There was an “unprecedented demand” for catastrophe bonds during the 12 months ending June 30, with no loss activity resulting in cat bond payouts for that period, while several new bonds cover Canadian earthquake risk, according to Aon Benfield Securities Inc.

Chicago-based Aon Benfield Securities released a 76-page paper that aims to review and analyze insurance-linked securities (ILS).

As of June 30, annual issuance volume reached $6.7 billion and total bonds at risk were $17.5 billion, surpassing the previous record of $16.2 billion as of June 30, 2008, according to the report, titled Capital Revolution – ILS Market Expands to New Heights. All figures are in U.S. currency.

“U.S. hurricane risk continued to be the main peril ceded to the ILS market, and comprised around two thirds of notional limit issued over the 12 months,” Aon Benfield Securities noted, adding the “contribution to expected modeled loss from U.S. hurricane risk for new property catastrophe issuances” increased from 51% during the year ending June 30, 2012 to 56% during the year ending June 30, 2013. The contribution from Europe windstorms dropped from 17% during the year ending June 30, 2012 to 6% during the following year.

“The contribution to expected modeled loss from U.S. earthquakes increased slightly” year-to-year, from 20% to 23%, according to the report.

Aon Benfield Securities noted that 27 transactions (including three covering life and health) closed during the year ending June 30. The average transaction size was $247 million, compared to $211 million during the year ending June 30, 2012.

Cat bonds covering Canadian earthquake risk included a $270-million transaction, issued by Lakeside Re II Ltd., providing Zurich Insurance Company Ltd. with annual aggregate coverage over three years.

Those bonds also cover U.S. perils. Earlier this year, Aon Benfield Securities reported, Blue Danube II Ltd. issued $175 million worth of cat bonds for Allianz Argos. Those bonds covered several perils including Canadian earthquake.

“Unprecedented demand for catastrophe bonds continued into the second quarter of 2013, with new issuance for the first half of 2013 totaling $4.0 billion – the largest issuance figure since the first half of 2007, where almost $5.0 billion of new catastrophe bonds closed,” Aon Benfield Securities reported.

“Despite such an active quarter, investor capital kept pace with primary market issuance. Many transactions were upsized, and oversubscription for issuances allowed a number of transactions to close at or below the low end of marketed price guidance.”

In the three months ending June 30, three bonds exposed to risks other than U.S. hurricane came to market. One of those was a $75-million issuance by Tramline Re II Ltd. on behalf of Amlin AG, which covers several perils, including Canadian earthquake.

Another was a $300-million by Merna Re IV Ltd. on behalf of State Farm Fire and Casualty Company. It covers against earthquakes in the area of New Madrid, Mo., about 200 km south of St. Louis, which was hit by three massive earthquakes  about 200 years ago.

New Madrid was destroyed Feb. 17, 1812 by an earthquake that is estimated to measure 7.7 on the Richter scale, according to the U.S. Geological Service. There were no seismographs at the time but USGS noted the most-affected “was characterized by raised or sunken lands, fissures, sinks, sand blows, and large landslides.” It covered an area of 78,000 to 129,000 square kilometers, from Cairo, Ill., to Memphis, Tenn.

A separate report issued last January by Lockton, quoting from the U.S. Federal Emergency Management Agency, predicted that a similar earthquake today could cause $300 billion of direct economic damage, with indirect losses possibly reaching $600 billion.

“Only one life was lost in falling buildings at New Madrid, but chimneys were toppled and log cabins were thrown down as far distant as Cincinnati, Ohio, St. Louis, Missouri, and in many places in Kentucky, Missouri, and Tennessee,” UGSG stated of the February, 1812 New Madrid quake. The first New Madrid quake — on Dec. 16, 1811 — was felt in New York City, Washington, D.C., and Charleston, South Carolina.

The risk of a similar quake today is covered on an indemnity basis by the Merna Re IV bonds issued in April on behalf of State Farm. That bond was priced at 2.50%, “the lowest absolute spread in five years,” Aon Benfield Securities reported.

Aon Benfield Securities, a subsidiary of London-based Aon plc, provides cat bonds, contingent capital, sidecars, collateralized reinsurance, industry loss warranties and derivative products.

“In all, the catastrophe bond market has seen $50.7 billion of cumulative issuance since 1996, demonstrating its importance as a strategic and efficient risk management tool,” Aon Benfield Securities CEO Paul Schultz wrote in the introduction of the ILS report.