LONDON, (Reuters)—Catastrophe bond issuance could double over the final three months of 2011, fueled by strong demand from investors seeking a haven from wild price swings in mainstream financial markets, brokerage GC Securities said on Tuesday.
A total of $2.12 billion of bonds were sold in the nine months to Sept. 30, but this could rise to as much as $4.5 billion by year's end thanks to robust investor demand as the Eurozone sovereign debt crisis weighs on stock and bond markets, said GC, part of insurance brokerage Marsh.
“Continued volatility in the broader financial markets and comparatively attractive returns are driving net new inflows to the sector,” said Chi Hum, global head of Distribution at GC Securities.
Cat bond issuance dropped off in early 2011 after risk modeling agency Risk Management Solutions, whose loss estimates are used to price many bonds, said the probability of hurricane damage to inland areas of the U.S. was higher than it had previously thought.
The changes increased loss estimates on many outstanding bonds, and deterred insurers and reinsurers from selling fresh securities.
But the market rebounded in the summer, GC said, with new issuance of $512 million over the three months to September making it the third-busiest third quarter on record.
New bond issuance in the third quarter was up 40 percent compared with the same period last year, Willis Capital Markets & Advisory said earlier this month.
Catastrophe bonds were developed in the 1990s to help insurers and reinsurers manage their exposure to natural disasters such as hurricanes by transferring some of the risk on their books to capital market investors.
Investors in cat bonds are largely insulated from wider macroeconomic or financial market developments, but risk losing some or all of their money if a natural disaster occurs.
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