As the U.S. enters this year’s hurricane season, the market for catastrophe bonds may face its biggest test since the collapse of Lehman Brothers Holdings Inc. in 2008 brought sales to a six-month standstill. Insurers and reinsurers sell cat bonds to investors such as hedge funds to help cushion potential claims from the most costly disasters, including earthquakes and U.S. hurricanes. Buyers demand yields above benchmark interest rates because they may lose their entire investment if a pre-defined disaster hits.SEE ALSO:
The U.S. National Oceanic and Atmospheric Administration predicts 14 to 23 named storms during this year’s Atlantic hurricane season. The June-through-November period may be “comparable to a number of extremely active seasons since 1995,” and even reach a record, NOAA said.
“A devastating U.S. hurricane season could be a real crash test for the cat bond market,” said Niklaus Hilti, who helps manage about $2.4 billion of debt as head of insurance-linked strategy at Credit Suisse Group AG. “Cat bonds with their collateralized structure could prove to be a much safer risk transfer for insurers.”
American International Group Inc.’s Chartis property- insurance unit, Swiss Reinsurance Co. and Allianz SE were among sellers of the 10 cat bonds sold so far this year. New sales of cat bonds stood at $2.4 billion, up 70 percent from the year- earlier period. That brings the volume of the investments outstanding to about $14 billion, according to Swiss Re.
Chartis Cat Bond
Chartis issued a $425 million cat bond last month through Lodestone Re, a special-purpose entity, to help protect it from U.S. hurricanes and earthquakes in its first purchase of reinsurance via capital markets. The bond’s $250 million slice will pay 8.25 percentage points more than three-month Treasury bills. The second slice yields 6.25 points above the benchmark.
“An extraordinarily large event may impair traditional reinsurers’ ability to pay, but that’s not a concern with a cat bond,” said Dave Fields, chief reinsurance officer of New York- based Chartis.
Proceeds from cat bond sales are invested in collateral such as government bonds that is used to pay interest to investors and payouts to the bond’s seller if a pre-defined disaster occurs. Buyers of Zurich Financial Services AG’s Kamp Re 2005 Ltd. cat bond were the first investors in these securities to lose money after Hurricane Katrina, the costliest storm in history, hit the U.S. Gulf Coast....MORE
"Ten catastrophe bonds close before hurricane season" (Transfer of risk 68 pct higher than same time last year)