FT.com Financial Times
By Alistair Gray in London
Axa has completed the biggest ever issuance of euro-denominated “catastrophe bonds”, underscoring investor hunger for securities whose performance is unconnected with wider financial markets.
The French insurer has sold €350m worth of the bonds to institutional investors, which have turned to the esoteric asset class in the face of low yields on offer from corporate and government debt.
They have flocked to the latest issue after an index of “insurance-linked securities” – including catastrophe bonds – tracked by Aon Benfield, the reinsurance broker, returned an average of about 8 per cent over the past 10 years.

Although the buyers of securities have enjoyed higher returns than benchmark stock and bond indices, some insurance executives have raised questions about whether they fully appreciate the risks they are running.

“I do wonder how many of them [investors] properly understand the exposure they’re getting,” said an executive at a leading reinsurance company on Wednesday.
Insurers such as Axa issue the securities to reduce their exposure to highly unusual events.
As a result, investors have so far only had to pay out on a handful of catastrophe bonds.
Investors in the Axa bonds would suffer losses only if a one-in-200 year windstorm strikes Europe in the next three or four years.
Nicolas Benhamou-Rondeau, Axa’s head of funding and risk transfer, said: “The vast majority of buyers are dedicated funds. They [the buyers] very well understand what they are doing.”
The Axa issue means global catastrophe bond sales are closer to reaching a potential $8bn this year, possibly topping the record level of annual issuance in 2007, according to Artemis, which tracks deals in insurance-linked securities.
It is also a sign that investors are becoming more eager to buy the bonds issued by European insurance companies.
So far, most catastrophe bonds have been issued by US insurance companies – in part because the models prospective investors use to assess their exposure are more developed.
The bonds sold by Axa, Europe’s second-biggest insurer by market capitalisation, tops the previous record for the biggest euro-denominated catastrophe bond transaction set in July.
Groupama, a smaller French insurer, sold $280m worth, according to Bloomberg data.
Axa has issued two classes of bonds. They will respectively pay 260 and 290 basis points above the yield that investors garner from the collateral they set aside to back the bonds.

Insurance companies have become more willing to issue the bonds instead of buying reinsurance – the traditional way in which they manage risks – because bouyant investor demand has made the terms more attractive for issuers.

James Vickers, chairman of the Willis Re International, the insurance broker, said that, historically, the main advantage for insurers in issuing such bonds was to spread risks among a wider range of counterparties.
“A lot of insurers didn’t do it – they thought it would cost them more [than buying reinsurance]. But if it’s going to cost the same, then why not.”

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