C&B Notes

Yield Chasing – Cat Bonds Edition

“Catastrophe bonds” allow insurers to offload risk to fixed income investors, making these bondholders be actual reinsurers.  Yield-hungry investors are buying up record amounts at nine-year low rates.  Reinsurance rates are under pressure as a result, and the likely winners will be the sellers.

With the U.S. hurricane season about a month away, insurers are issuing “catastrophe bonds” at the fastest clip since before the financial crisis.  Insurers sell the bonds to help cover potential claims from hurricanes, tornadoes, earthquakes and other major insured risks…

Cat-bond issuance in the first quarter more than doubled from the year-earlier period, to $1.2 billion, and second-quarter issuance is expected to hit an all-time high above $3.5 billion, according to Willis Capital Markets & Advisory.  More than $2 billion of deals have closed or been announced this quarter, Willis said.   Citizens Property Insurance Corp., the state-run insurer in Florida, this week boosted its latest cat-bond offering to at least $1.25 billion from $400 million, according to investors.  It would be the largest single cat-bond transaction ever, according to Artemis, an insurance-linked data provider.  Yields on cat bonds, meanwhile, have sunk to their lowest level in nine years.  The average quarterly yield dipped to 5.22% recently, from 9.61% in 2012…

“Institutions of smaller and smaller size are becoming interested in the market,” said Brett Houghton, a managing principal at Connecticut-based Fermat Capital Management LLC, a long-standing specialist in catastrophe bonds, with $4.4 billion under management.


Cat bonds have become especially popular as an alternative to reinsurance policies in hurricane-prone Florida. With no hurricane landing there since 2005, interest payments on the debt have been uninterrupted, and principal on bonds that haven’t matured has gone untouched.  Trevor Hillier, vice president of finance and accounting at American Strategic Insurance Corp., based in St. Petersburg, Fla., said the current low rates led the insurer to use cat bonds to cover named U.S. storms and severe thunderstorms, after rejecting the idea twice in previous years.  In March, an ASI affiliate called Gator Re issued $200 million in cat bonds to provide reinsurance to ASI, boosting the size from $125 million and lowering yields from an expected 7%-7.75% to 6.5%.

In California, where earthquakes shook Orange County last month, the growth of the cat-bond market has been “really game-changing,” said Glenn Pomeroy, chief executive of the California Earthquake Authority, a publicly managed, privately funded quake insurer that has sponsored three cat-bond offerings since 2011.  The “tremendous amount” of new money flowing into cat bonds has increased price competition with reinsurers, he said.