Investors lured by $8 billion high-yield disaster bonds

LONDON Tue Feb 26, 2008 9:11am GMT

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LONDON (Reuters) - Investors are flocking to insurance-risk bonds that offer high yield at relatively low risk in turbulent credit markets, bankers said on Monday.

The sale of disaster bonds by insurers, transferring the potentially crippling cost of earthquakes, hurricanes and floods to capital markets investors, beat the credit crunch to soar to some $8 billion (4 billion pounds) globally in 2007, nearly double the previous year's figure.

"Over the past six months, from the midst of the liquidity and credit crunch, the investor base has still been there for insurance-linked securities. In fact it's not just still there, it's growing," said Michael Eakin, executive director in the insurance financing group of Goldman Sachs (GS.N).

"Every (bond) issue that we bring to market ... we are bringing new investors to the market, real money investors from Europe and the United States, but also from farther afield -- Australasia and the Middle East," Eakin told an industry conference in London.

More investors are being attracted by the high rewards offered by "catastrophe bonds", whose risks are fairly clear, in contrast to other structured credit products, whose values slumped because investors struggled to understand how much risk they contained.

"Twelve months ago, where could you have earned 600 or 800 basis points over Libor?" Tom Keatinge, head of European insurance capital management at JP Morgan (JPM.N), asked the conference.

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Catastrophe bonds "pay a decent yield and many are very simply structured and easy to understand. There's an opportunity to earn yield that perhaps, as an investor, you didn't look at before. But you really do have to look at them now to make the returns you were making previously," said Keatinge.

John Brynjolfsson, managing director and portfolio manager at bond fund manager PIMCO, said the yield on offer from such bonds had come down, as prices for traditional catastrophe reinsurance had fallen, but remained attractive.

"Pricing isn't as outrageously compelling, but it's still compelling," Brynjolfsson said.

PIMCO, part of German insurer Allianz (ALVG.DE), has put around $2 billion into catastrophe bonds, but its investors have authorised it to plough up to $20 billion into such investments, he said.

More insurers are looking to capitalise on the growing number of investors hungry for insurance risk by issuing more bonds, thereby laying off some of their disaster risks which, due to climate change, are increasing.

"The problems in other parts of the credit market aren't affecting non-life insurance securitisations. We're seeing a good pipeline of deals," Luca Albertini, head of ABS and insurance-linked securities origination and structuring at Swiss Re RUKN.VX, told Reuters on the sidelines of the conference.