Hurricane Sandy may have devastated the Jersey shore, but it
didnt dampen investor interest in high-yielding
catastrophe bonds. The market for natural disaster cat
bonds, which property and casualty insurers issue to
transfer risk, just had its best year for new issuance since
2007 thanks to a strong fourth quarter, though some older bonds
with exposure to Sandy may end up getting nicked for some of
The first deal after Sandy, from insurer USAA in November,
covers a range of U.S. perils, including hurricanes, severe
thunderstorms, earthquakes, winter storms and California
wildfires. The company increased the offering from $250 million
to $400 million in response to demand from investors. It was
able to do so even though Standard & Poors Corp. had
put two of the earlier bonds in USAAs Residential
Reinsurance series, from 2011 and earlier in 2012, on
CreditWatch with negative implications because of potential
losses from Sandy.
The successful Residential Re 2012-2 placement
post-Sandy was a very good sign, says William Dubinsky,
the head of insurance-linked securities at Willis Capital
Markets & Advisory, the investment banking arm of the
global insurance broker. That kind of deal, with those kinds of
risks, is the bread and butter of the natural
disaster catastrophe bond market, he says.
Last year companies issued a total of $5.9 billion in bonds
in the natural disaster category, bringing the total amount of
outstanding natural disaster cat bonds to $15.2 billion
globally. Overall, cat bond issuance, including a much smaller
market segment devoted to pandemic and mortality risk, was
slightly more than $6 billion.
Last years natural disaster bond issuance was up by
37.2 percent from 2011s $4.3 billion. Dubinsky says 2013
should be even stronger. The pipeline that were
aware of is pretty good, he says.
Still, the size of the cat bond market remains small.
Outstanding debt totals $36 billion once private placements are
included, with the U.S. accounting for over a third of that.
Thats roughly equal to the amount of reinsurance premiums
taken in by just one company, market leader Munich Re, in
Then again, the market for cat bonds is relatively new. The
first natural catastrophe bond was issued in 1996. In the wake
of Hurricane Andrew in 1992 and the Northridge earthquake in
Los Angeles in 1994, insurers started thinking about new ways
of raising additional capital to cover truly extraordinary