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2011 cat bond sales start strongly

Cat bond sales have made a strong start to 2011, with industry stalwart Swiss Re completing its largest ever Successor note issue and US insurer The Hartford closing its latest Foundation Re bond oversubscribed.~

Both bonds cover US wind risk and their success demonstrated continued investor appetite for the peak peril.

After running into a halt in mid-2010, demand for peak US wind risk picked up again late last year with a strong response to the Lodestone, Montana and Residential Re offerings. These offers helped take total 2010 sales to $5.6bn, according to data collected by sister title Trading Risk.

This was the first year of sales growth for the market since 2007 and industry figures expect the numbers this year to follow suit. Major cat bond managers polled by Trading Risk have on average predicted $6bn in sales for 2011.

Investors are also hopeful that insurance-linked securities (ILS) stalwarts USAA and Scor will continue to issue regular offerings under their shelf programmes, Residential Re and Atlas Capital respectively.

Meanwhile, another repeat ILS sponsor has joined the 2011 fundraising market. Chubb is seeking $200mn of cover against north-eastern US wind and quake losses from its fourth East Lane Re cat bond.

If successful, the notes will provide indemnity cover against north-eastern US hurricanes, earthquakes, severe thunderstorms and winter storms. Chubb will retain a 10 percent co-insurance on the reinsured layers.

The notes will partly replace the $450mn of East Lane Re and East Lane Re II notes that mature ahead of the 2011 US hurricane season.

Fellow US insurer The Hartford's latest Foundation Re cat bond closed at $135mn, up from an initial $100mn target, and will pay investors 500 basis points (bps) above Treasury money market returns.

The Foundation Re III Class A notes closed on 18 February and will offer the repeat ILS issuer four years of industry loss-triggered cover against US hurricane exposure.

The transaction is The Hartford's fourth, taking its total ILS issuance tally to $810mn since 2004.

Swiss Re's Successor X 2011-2 notes also closed successfully after a quick fundraising period, raising $305mn to provide three years of combined US wind and California quake cover.

Successor 2011-2 Class IV-E3 raised $160mn and will pay investors a spread of 925 basis points (bps) above a discounted Libor rate (-30bps). The Class IV-AL3 notes raised $145mn and will pay Libor (-30bps) plus a spread of 1300bps.

The Class IV-E3 notes were rated B by Standard & Poor's and the AL3 notes were unrated.

The notes offer Swiss Re US wind coverage based on a PCS industry loss trigger, while the quake exposure will be triggered by a parametric calculation. The collateral on the E3 tranche will be invested in puttable IBRD notes and the AL3 notes in Treasury money market funds.

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