Catastrophe Bond Sector Booming

Investors showing appetite for destruction.

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hurricane trailerDec 20 (Reuters) – Chartis, which sold its debut catastrophe bond in May, has added another $450 million to its existing U.S. coverage for hurricane and earthquake amid a flurry of activity from bond sponsors looking to close transactions before year-end.

Rating agency Standard & Poor’s said on Monday it issued a BB+ and BB rating to the Series 2010-2 Class A-1 and Class A-2 notes, respectively, issued by Bermuda-based special purpose vehicle Lodestone Re Ltd.

The bonds will cover National Union Fire Insurance Company of Pittsburgh, a subsidiary of Chartis, the general insurance business of AIG (AIG.N), against losses from hurricanes and earthquakes in the United States.

The cat bond sector, in which insurers transfer risks associated with natural disasters to capital market investors, was heavy with bonds covering U.S. hurricane risk in the first half of the year. But investor appetite has returned — as evidenced by the significant increase in the size of Lodestone Re, from $250 million in the marketing phase to $450 million at close.

The $125 million Class A-1 notes and $325 million Class A-2 notes will mature in 2014, and both use U.S. money market funds for the collateral structure. The notes will pay interest equal to the yield on these funds plus 6 percent for the Class A-1 notes and 7.25 percent for the Class A-2 notes, S&P said.

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