Catastrophe-Bond Offerings Fall as Performance Shines, Aon Saysby
Hurricane bonds earned 7.73% in year though June, report finds
Cat bonds outperformed S&P 500, Treasuries for the period
Catastrophe-bond issuance slipped to its lowest level since 2011 over the past year as the securities outperformed the S&P 500 Index, according to insurance broker Aon Plc.
About $5.2 billion in cat bonds was issued in the 12 months ending June 30, a decline of $1.8 billion from a year earlier, Aon said in a report issued Thursday. Some investors stayed away from the securities early this year as they awaited other opportunities, according to the report.
“The overall lower issuance levels were driven by a number of factors including competition from traditional markets,” Aon said. “Despite the lower supply of catastrophe bonds for sale, many investors were reluctant to increase bids, preferring to hold onto cash in anticipation of new issues.”
Returns on insurance-linked securities ranged during the year from 4.85 percent for earthquake bonds to 7.73 percent for hurricane bonds, Aon said. That compares with about 4 percent for the S&P 500. The securities offer higher yields than most bonds, but investors risk losing their principal in major disasters.
Catastrophe bonds also help investors diversify their portfolios. Aon’s report comes ahead of a reinsurance conference in Monte Carlo starting Sept. 10.
Insurers, reinsurers and other firms issue cat bonds to spread risks to capital markets. Credit Suisse Group AG took orders this year for a security that would help provide coverage for operational failures and unauthorized trading. Amtrak, the U.S. long-distance passenger railway, issued its first-ever cat bond in October.
The bonds cover an array of risks including mortgages, mortality and medical costs. Aon said hedge funds were the only investor class that increased bets on such holdings during the period, “in response to the number of high-yielding transactions coming to market.”
A rush of interest and a lack of major natural disasters have pressured yields. And other insurance-related investment options have emerged, Aon said. They include managing general agencies, which construct and sell policies for very specific risks, and so-called collateralized reinsurance, in which investors provide capital to back the underwriting of contracts tied to weather-related risks or other perils.
The slowdown in cat-bond issuance comes after the total market hit a record at $26.5 billion at the end of the first quarter of 2016, according to Artemis, which tracks the data and publishes a report along with a division of insurance broker Marsh & McLennan Cos.