‘Strong investor demand’ in 2013 for cat bonds: Aon Benfield Securities

There was “strong investor demand” in catastrophe bonds in the fourth quarter of 2013, with a total of US$7.5 billion in new cat bonds issued during the calendar year, according to a recent report from Aon Benfield Securities.

As of Dec. 31, the total limit of cat bonds outstanding was US$20.3 billion, according to Aon Benfield Securities’ Insurance-Linked Securities Fourth Quarter 2013 Update, released Monday. Chicago-based Aon Benfield Securities, a reinsurance intermediary and capital advisor, is a division of London-based Aon plc.

“Strong investor demand continued with the diverse range of transactions occurred,” Aon Benfield Securities stated in the report. “Many transactions increased from the announced issuance size and priced at the low end of, or below, interest spread guidance.”

The cat bonds issued in 2013 covered perils such as extreme mortality, Australia cyclone and earthquake, Japan earthquake and Europe windstorm.

Canadian earthquake was another peril covered by cat bonds issued last year. Aon Benfield Securities cited four issuances in the fourth quarter — by Tradewynd Re Ltd. on behalf of American International Group Inc. — with a combined size of US$525 million, whose covered perils included Canadian earthquake.

“Demand for diversifiers was evident throughout the second half as each diversifying peril issued during the period priced at the low end, or below, initial guidance,” Aon Benfield Securities noted.

“The fourth quarter of 2013 saw the maintaining of robust ILS issuance volumes and ever increasing interest from both sponsors and investors,” stated Paul Schultz, chief executive officer of Aon Benfield Securities, in a press release. “When we look back at the year as a whole, we see that the ILS sector has recorded a ground-breaking 12 months, where ILS pricing decreased to levels that are highly competitive with traditional reinsurance. In certain peak zone areas, we have seen catastrophe bonds become a more cost effective risk transfer mechanism than solutions available in the traditional market. We expect 2014 to see continued inflows of capital and the ILS sector to make further progression.”

New market sponsors during the second half of 2013 included AXIS Specialty, American Modern Insurance Group, Inc., QBE Insurance Group, Achmea Reinsurance Company N.V. and the Metropolitan Transportation Authority, which runs subway, bus and commuter train services system in New York City some of the surrounding area.

Aon Benfield’s report referred to a US$200-million issuance, by MetroCat Re Ltd., to cover northeastern United States storm surge.

Guy Carpenter & Company LLC announced last summer that GC Securities had placed US$200 million in cat bonds, through Metrocat, a cat bond shelf program. Those bonds were placed to benefit First Mutual Transportation Assurance Company (FMTAC), which insures MTA’s risks. Those bonds provide three years of per occurrence storm surge height protection in the New York City area during a named storm, until 2016.

Other cat bond issuances from the second half of 2013 cited by Aon Benfield included:

•US$200 million issued by Northshore Re Ltd. on behalf of AXIS Specialty Ltd. to cover U.S. hurricane and earthquake;

•US$250 million issued by VenTerra Re Ltd. on behalf of QBE to cover U.S. earthquake, Australian earthquake and Australian cyclone; and

•€280 million issued by Green Fields II Capital Ltd. on behalf of Groupama SA to cover Europe windstorm.

As of Jan. 13, a U.S. dollar was worth Cdn $1.09 and a Euro was worth Cdn $1.49.