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Seven cat bond deals total $1.41 billion in first quarter: Aon Benfield Securities


April 24, 2014   by Canadian Underwriter


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Investors continued to pounce on cat bonds during the first three months of 2014, with Aon Benfield Securities Inc. reporting seven transactions totalling US$1.41 billion during Q1.

In its Insurance-Linked Securities First Quarter 2014 Update, Chicago-based Aon Benfield Securities reported Thursday that the largest deal of the quarter, worth $300 million, essentially covers State Farm Fire and Casualty Company in case of a recurrence of the so-called New Madrid series of earthquakes in 1811 and 1812 that were centred in southern Missouri and are estimated to have exceeded 7 on the Richter scale. All figures are in United States dollars.

New issuances of ILS in Q1 2014 “did not keep pace with the USD2.4 billion of bonds that matured” during the same quarter, noted Aon Benfield Securities, a subsidiary of London-based Aon plc whose offerings include cat bonds, sidecars and collateralized reinsurance.

The company reported in January that as of Dec. 31, 2013, the total limit of cat bonds outstanding was US$20.3 billion.

“Seven transactions closed during the first quarter of 2014, making it the second most active for any first quarter on record,” the company said in its Q1 2014 update. “Meanwhile, market conditions for insurance linked-securities (“ILS”) followed the historic low rates seen in 2013, as strong demand for catastrophe bonds continued among sponsors and investors.”

As of March 31, the “trailing 12-month ILS issuance total” was $8.2 billion, according to the report.

“In the absence of severe catastrophic events, Aon Benfield Securities forecasts that 2014 will be another positive year for the Aon Benfield ILS Indices, as the market broadens the spectrum of available risks and expands coverage to also encompass the lower layers of sponsors’ reinsurance programs,” the company stated.

“Investors were provided with a variety of risks to choose from, including regional U.S. earthquake, regional, nationwide and North American multi-peril, Japanese earthquake, worldwide hurricane and cyclone, and U.S. health.”

The largest deal listed was a $300 million issuance by Merna Re V Ltd. on behalf of State farm, covering against earthquakes in the area of New Madrid, Mo., about 200 km south of St. Louis. New Madrid was destroyed Feb. 17, 1812 by an earthquake estimated to have measured 7.7 on the Richter scale, according to the U.S. Geological Service. Two similar incidents occurred Jan. 23, 1812 and Dec. 16, 1811. Though they caused huge waves on the Mississippi River and “deep-seated landslides,” the area was sparsely populated at the time, USGS notes. But in a separate report issued in January 2013, Lockton quoted the U.S. Federal Emergency Management Agency as predicting that a similar disaster today could cause $300 billion of direct economic damage.

“Of note, strong investor interest in Merna Re V reduced the spread to two percent, representing a 20 percent decline compared to the Merna IV issuance in the first quarter of 2013, and the lowest spread for a non-investment grade bond in six years,” Aon Benfield stated, referring to the $300-million Merna IV issuance —  which also covers State Farm for New Madrid earthquake risk — during the second quarter of 2013.

The second largest issuance in Q1 2014, of $270 million, was issued by East Lane Re VI Ltd. on behalf of Chubb Group. Those bonds cover hurricane, earthquake, severe thunderstorm and windstorm risk in the northeastern U.S.

Meanwhile, Queen Street IX Re Ltd. issued $100 million worth of cat bonds on behalf of Munich Re, covering U.S. hurricane and Australian cyclone risk. Also in Q1, Riverfront Re Ltd. issued $95 million in cat bonds on behalf of

Great American Insurance Company, covering U.S. and Canadian hurricane, earthquake, severe thunderstorm and wind storm.  Great American was one of two new sponsors of cat bonds in the latest quarter, Aon Benfield Securities noted. The other was American Strategic Insurance Group (ASIG). In Q1, Gator Re Ltd. issued $200 million worth of bonds, covering U.S. hurricane and severe thunderstorm, on ASIG’s behalf.

Other deals that closed during the first quarter were two issuances — with a combined total of $245 million — by Kizuna Re II Ltd. on behalf of Tokio Marine & Nichido Fire Insurance Co. Ltd. covering Japanese earthquake risk.


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