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A.M. Best: 2012 Banner Year for Cat Bonds; 2013 Could Bring New Risks, New Sponsors

Posted on 14 Feb 2013 by Neilson

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AM BestMore catastrophe bonds were issued in 2012 than any other year except for 2007, a sign the 16-year-old marketplace is maturing, said Asha Attoh-Okine, managing senior financial analyst of insurance-linked securities at A.M. Best Co.

2013 will also be a good year for cat bonds, Attoh-Okine said. "I would not be surprised to see one or two new sponsors and new risks come to the market," he said.

One new risk that might find a place with the cat bond market would be workers' compensation risk, he said.

Aetna sponsored a $150 million catastrophe bond to cover medical benefit risk in 2012, he said. Workers' comp would involve similar modeling. A recent Aetna transaction for medical benefits was completed in January 2013 for $150 million as well.

"If you can do that for health, why not for workers' comp? It would be an excess-of-loss reinsurance transaction. It can be done," Attoh-Okine said.

Cat bonds for property/casualty-related risks issued in 2012 totalled $5.9 billion, up from $4.3 billion the year before, and the second-highest ever behind the $7.4 billion issued in 2007, Attoh-Okine said.

"It's still a relatively small market compared to the traditional reinsurance market, but it is a market that is maturing," Attoh-Okine said.

2012 was also marked by $15.1 billion in outstanding cat bond capital, the highest level of ever for the industry, according to A.M Best Co. and Guy Carpenter & Co. The second-highest year of 2007 had $14 billion in outstanding capital.

"The market is becoming more of a usual market, where repeat sponsors are in the market to stay," Attoh-Okine said.

Also, a growing number of government-run insurers of last resort have entered the market, including Louisiana Citizens Property Ins. Co., which sponsored a $125 million cat bond and Florida's Citizens Property Insurance Corp., which sponsored a $750 million cat bond.

Also in the market in 2012 was the California Earthquake Authority, which sponsored two cat bonds totalling $450 million.

Specialized investors that run insurance-linked security funds are hungry for more catastrophe bonds to be issued, Attoh-Okine said, and that has also driven the growth in the market.

"You have suppliers who want to issue cat bonds as part of their reinsurance programs and on the demand side, you have investors with money who are willing to invest in cat bonds," he said.

Fixed-income investors who are seeking higher returns than U.S. Treasury bonds find spreads they like in the cat bond market, Attoh-Okine said.

2012 was also marked by the largest yearly issuance of indemnity bonds, which are triggered by the sponsors' actual losses versus some other form of trigger, such as a parametric measure, according to Swiss Re's insurance-linked securities market update.

Cat bonds issued were 53% indemnity versus 45% non-indemnity. This compares to 33% indemnity versus 67% non-indemnity in 2011.

"People are becoming more comfortable with indemnity transactions and companies are becoming more willing to share their data," Attoh-Okine said.

One recent indemnity transaction was Skyline Re 2013-1, which provides $61.2 million in indemnity reinsurance protection for Cincinnati Insurance Cos. against New Madrid earthquakes and severe thunderstorms.

The Skyline Re transaction was well received by the market, Towers Watson said, because it brought both a new cedent to the marketplace and it brought diversifying risks.

About 71% of all cat bond capacity is still tied to U.S. wind risk, according to Willis Capital Markets & Advisory.