Aon Benfield records ‘unprecedented demand’ for cat bonds

In its review of cat bond activity during the second quarter of 2013, Aon Benfield Securities cited the closing of thirteen cat bonds, while sounding a note of optimism in general for this form of alternative investment. According to the reinsurance broker, the first half of 2013 saw the highest value of cat bond issuance since 2007.

The report also noted the likelihood of several other cat bonds closing shortly, within the next few weeks, which would come on the heels of the $4 billion (US) attributed to the year’s first six months. Among the natural disasters covered in the second quarter were hurricanes in Florida, Louisiana, North Carolina, as well as nationwide, and a Turkey earthquake, which garnered $400m. Turkey’s exposure to seismic activity has been well documented in recent years, as the country sits atop colliding plates and a pair of major fault lines. In 2011 a magnitude 7.2 earthquake struck eastern Turkey, just outside the city of Van.

Aon also reported a prevalence of repeat sponsors issuing new cat bonds during the quarter, citing The Travelers Indemnity Company and Assurant Inc. as two examples. However, it balanced this with the prediction that the ILS domain will see new participants going forward, in large part due to the continued attractiveness of returns and diversification for investors, even amid a downward trend in pricing for insurance linked securities.

All State Insurance Company returned to the cat bond market in the second quarter, after a near five-year absence. The insurer managed to secure $350m, split between two classes, through issuer Sanders Re Ltd. The cat bond covers hurricanes over a significant portion of the US, as well as earthquakes throughout just three states, Washington, California and New York.

In its comparison of quarterly catastrophe bond issuance since 2009, Aon is expecting a high volume of transactions for the second half of 2013. A quarter-by-quarter breakdown since 2009 shows relatively little activity during summer, followed up by robust activity toward the end of the year. The report predicts a similar finish to 2013, with as much as $8 billion in total new cat bond issuances being registered for the entire year.

The inherent unpredictability and risk associated with the cat bond market, as well as reinsurance in general, leaves performance in this sector for the remainder of 2013 subject to the whims of Mother Nature. However, despite the unlikelihood of surpassing or meeting the healthy returns of 2012, Aon sees 2013 as playing out positively for ILS investors, barring any catastrophic, triggering occurrences during the remaining two quarters.

Posted: Monday, September 30th, 2013