The outlook for the catastrophe bond market this year is positive despite losses from the Japan earthquake, Aon Benfield says in its latest annual review of insurance-linked securities.

The review found the cat bond market is healthy and growing. The number of outstanding bonds fell in the year to June 30, to $US4.4 billion ($4.13 billion) from $US4.7 billion ($4.4 billion), due to some large maturities and market interruptions caused by changes to cat models and the Japan earthquake.

The $US300 million ($283.2 million) Muteki bond became the first cat bond to sustain a total loss, with the sponsor, Munich Re, receiving the full payout as a result of the earthquake.

More than 50% of cat bonds are written for US hurricane risk, and Aon Benfield says there is strong demand for bonds, particularly for paper with non-US hurricane exposure.

It says despite losses from the Japan earthquake, its All-Bond Index returned 5.97% for the year. 

“Investors will continue to regard insurance-linked securities as a viable option that has consistently provided competitive returns versus similarly rated corporate securities,” says the report.

Aon expects more non-US risk to be ceded to the market as repeat and new sponsors use bonds for diversification and to complement their total reinsurance purchases.

It says the disruption in the market caused by catastrophes and model changes saw the re-emergence of sidecars – independently capitalised insurance vehicles used by investors who have capital but not underwriting expertise – with $US680 million ($641.3 million) raised in four deals this year.

These allowed sponsors and investors to capitalise on market opportunities and provided meaningful capacity to the market.

Aon Benfield says additional sidecar activity will be largely dependent on new catastrophes.