Baden-Baden: Cat bond issuance on target for $6bn in 2012

Cat bond issuance for 2012 is looking likely to achieve the predicted target of $6bn for the year as activity picks up in the fourth quarter.

So far in October, Munich Re, Swiss Re and Scor have bought bonds worth a combined $250m to market for perils including US and European windstorm and UK mortality, with expectations some of the bonds could be upsized in the face of strong investor demand.

Munich Re is marketing a $75m issue through its Queen Street VII Re programme to cover US and European windstorms.

Swiss Re is looking to sell protection against US hurricane and UK extreme mortality risk through its Mythen Re 2012-2 vehicle, via three classes of risk. It is understood the reinsurer is targeting at least $75m across all three classes.

And Scor’s latest Atlas offering is a $100m dual-tranche issue against US and European windstorm risk.

The increase in cat bond activity is a typical occurrence in the fourth quarter of the year as cedants look to transfer some of the peak natural catastrophe risks ahead of the 1 January reinsurance renewals.

Upsized offering

These latest issues follow the completion of a Mexican earthquake and hurricane catastrophe bond. The bond was upsized slightly from $300m to $315m after being well received by investors.

Issued by Cayman Islands-based Multicat Mexico 2012-1 Ltd, the bond is sponsored by the Fund for Natural Disasters of Mexico (FONDEN).

Through Mexico’s state-owned reinsurer Agroasemex, FONDEN is using the insurance-linked securities (ILS) deal to gain catastrophe protection. Swiss Re is the ceding reinsurer and will be responsible for payments due under the contract. The modelling for both quake and windstorm perils was carried out by AIR Worldwide.

So far 2012 has been a strong year for ILS. In the first quarter, a record of $1.49bn of cat bonds were issued eclipsing the previous record set in Q1 2011 of $1.02bn.

At 30 June 2012, total bonds on risk stood at $14.92bn, according to Aon Benfield Securities, an increase of $3.4bn from 30 June 2011.

Investors are increasingly hungry for insurance products at a time when returns on more traditional equity and fixed income products are poor. Insurance-linked securities (ILS) have an added benefit in that they are generally not correlated to the wider financial markets.

Bermuda is becoming an important centre for ILS as the traditional reinsurance market and non-traditional markets continue to converge.

The Bermuda Monetary Authority registered 15 special purpose insurers (SPIs) with total premiums of $595m in the first nine months of 2012 – one registration higher than the same period a year ago. This includes four SPIs underwriting over $1.2bn of cat bonds.

“We are seeing continued momentum and high levels of market interest in the SPI and ILS spaces,” BMA director of licensing and authorisations Shelby Weldon said. “This supports reports from industry that Bermuda is emerging as an innovative centre for this type of business due to the wide variety of SPI uses we are starting to see develop.”