Cat bond sponsors ‘brought perils and terms not seen in their previous transactions’ in 2014

A “relatively active” secondary market for catastrophe bonds last year helped support the primary market, while sponsors of cat bonds “brought perils and terms not seen in their previous transactions,” Aon plc’s reinsurance intermediary said in a recent report.

With $5.5 billion in catastrophe bonds scheduled to mature during the first half of this year, investors in 2014 “sought to make room for new deals in their portfolios by selling existing holdings in the secondary market,” Aon Benfield stated, in Insurance Linked Securities Fourth Quarter 2014 Update.

“A relatively active secondary market enabled investors to access extra capacity and helped to further support the primary market.” All figures are in United States dollars.

In the report, Aon Benfield published four of its ILS indices compared them to benchmark stock and bond indices for both the full year and final three months of 2013 and 2014.

The one-year return for the U.S. Hurricane Bond Bloomberg Ticker dropped, from 11.12% in 2013 to 7.37% in 2014. The three- to five-year U.S. Treasury notes were 2.21% in 2014, while the S&P 500 was 11.39%. For full-year 2014, the all bond Bloomberg Ticker was 4.39%, the U.S. Earthquake Bond Bloomberg Ticker was 3.46% and the BB-rated Bond Bloomberg Ticker was 2.02%.

“The Aon Benfield ILS Indices are calculated by Bloomberg using month-end price data provided by Aon Benfield Securities,” according to the report.

As of Dec. 31, 2014, total catastrophe bonds on-risk stood at $24.3 billion and total issuance in 2014 was $8.2 billion, Aon Benfield noted.

“Despite no new sponsors accessing the market during the period, returning sponsors brought perils and terms not seen in their previous transactions,” Aon Benfield stated. “For instance, Everest Re’s North America earthquake transaction, Kilimanjaro Re Limited Series 2014-2 Class C, followed the successful placement of its Southeast named storm transaction and North America multi-peril transaction earlier in 2014.”

Aon Benfield was referring to Kilimanjaro Re’s $500-million issuance, of a BB-rated bond, with an interest spread of 3.75%, covering earthquake risk in Canada and the U.S. Another example was $375 million – in two issuances – by Nakama Re Ltd. on behalf of National Mutual Insurance Federation of Agricultural Cooperators (Zenkyoren).

“Zenkyoren utilized a rolling term aggregate structure to cover Japan earthquake exposures,” Aon Benfield stated. “Sponsors maximized capacity by pursuing these different structures from their previous transactions.”

In the fourth quarter, interest spreads ranged from 2.125% for one of Zenkyoren’s issuances, to 9.75%, for a $200-million issuance by Tramline Re Ltd. The Tramline bond, issued on behalf of Amlin AG, covers “U.S. named storm and earthquake coverage along with Europe windstorm for a higher risk layer than was typically seen in 2014 issuances,” Aon Benfield stated.

“After the U.S. hurricane season came to a close, most trading throughout the fourth quarter involved hurricane transactions with less than six months until maturity,” Aon Benfield stated. “Specifically, institutional investors sought to purchase these securities to achieve yields higher than would be realized by holding cash or cash-like instruments. Sellers used the freed capital to invest via the new issue market and extend portfolio duration.”