Munich Re Expects Second-Half Cat Bond Issues to Match First Six Months
Munich Re, the world’s biggest reinsurer, expects catastrophe bond sales in the second half of this year to match the $2.4 billion sold in the first six months as buyers broaden their risk coverage.
“Investors are looking for a diversification of risks after they loaded up heavily on U.S. hurricane risks in the first half,” Rupert Flatscher, head of risk trading at the Munich-based reinsurer, said in an interview. “We will see more cat bonds selling coverage for European wind storms, U.S. and Japanese earthquakes as well as typhoons.”
Insurers and reinsurers sell cat bonds to hedge funds and other investors to help cushion claims from the most costly disasters, including earthquakes and U.S. hurricanes. Munich Re, Swiss Reinsurance Co. and American International Group Inc.’s Chartis property-insurance unit were among the sellers of this year’s 11 cat bonds.
Munich Re reiterated its projection for 2010 sales of as much as $5 billion, Flatscher said, adding that about $1.8 billion of existing bonds mature in the second half.
Some investors “simply aren’t allowed to buy more hurricane risks,” Flatscher said. “That will lead to stronger demand for diversifying risks, which should also lead to good prices for issuers, triggering new transactions.”
All except one of the cat bonds sold this year include coverage for U.S. hurricanes. Only the Merna Re II Ltd. bond, sold in March to protect U.S. insurer State Farm Fire & Casualty, exclusively covered U.S. earthquake risks.
Secure Collateral
Proceeds from cat bond sales are invested in collateral such as government bonds or money market funds, which is used to pay interest to investors and for payouts to the bond’s seller if a pre-defined disaster occurs. Munich Re opposes calls from some industry participants to make higher-return benchmarks such as the London interbank offered rate the basis of the spread offered to investors, Flatscher said.
“Money market funds are the most secure instrument at the moment and I can’t understand why people want to embed hidden credit risks into the collateral,” he said. “Banks simply want to move the market toward higher collateral returns as that earns them more money.”
To contact the reporter on this story: Oliver Suess in Munich at osuess@bloomberg.net
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