Tuesday, October 12, 2010

760 Days Without a Landfalling U.S. Hurricane = Investors Begging for Catastrophe Bonds

Hurricane Ike made landfall on September 13 2008, nothing since. So (from Reuters):
Cat bond demand up as quiet wind season nears end
Dwindling investor interest in catastrophe bonds exposed to U.S. hurricane risk dominated third-quarter trading, but a calm U.S. wind season has helped prices rebound, broker Aon Benfield (AON.N) said on Tuesday.

Cat bond spreads widened sharply ahead of the Atlantic hurricane season, which runs from June 1 to Nov. 30, as the market was inundated with new issues covering U.S. wind risks.

Catastrophe bonds allow insurers to pass on extreme risks, such as those related to earthquakes or hurricanes, to financial market investors, and are seen as an alternative to reinsurance.

But a relatively benign U.S. wind season has brought prices back to normal market levels, said Aon Benfield in a report.
As of Sept. 30, 52 percent of outstanding issuance in the cat bond market related to U.S. hurricane risk, nearly double the 27 percent seen immediately after 2005's Hurricane Katrina, the insurance industry's most costly natural disaster.
The weighted average price of U.S. hurricane bonds decreased 1.4 percent during July, while spreads increased 7.7 percent in the secondary trading market, said Aon Benfield.
Pressure on pricing weakened demand for U.S. hurricane-exposed bonds in the third quarter, as demonstrated by Munich Re's (MUVGn.DE) Shore Re, which exposes investors to Massachusetts Hurricane risk through the Massachusetts Property Insurance Underwriting Association (MPIUA).

The Shore Re tranche A notes closed at a size of $96 million, below the $100 million targeted, while a second tranche failed to close altogether as investors approached or exceeded their U.S. hurricane portfolio limits, said Aon Benfield.

"The lack of receptivity to U.S. hurricane-exposed bonds signalled investors' evolving eagerness to diversify their portfolios by seeking non-peak peril catastrophe bonds," said the report.

Swiss Re's (RUKN.VX) recent bond, GreenValley II, which covers insurer Groupama with protection against French windstorm risk, was issued in September and was the first cat bond issued in 2010 that did not include U.S. peril risks. The bond was heavily oversubscribed and ultimately priced below the indicated range, said Aon Benfield....MORE