Catastrophe bond market growth expected in 2011

by Artemis on January 24, 2011

Confidence is brimming about the prospects for another healthy year of catastrophe bond issuance. Global reinsurer, Munich Re have issued a press release discussing the prospects for the market over the coming year. They expect the market to achieve total growth in 2011, with a greater volume of catastrophe bonds issued than the volume of cat bonds maturing. So the overall size of the market measured in outstanding (not matured) catastrophe bonds will increase.

“As a result of the low interest-rate environment in the capital markets, catastrophe bonds will become increasingly attractive for major institutional investors such as pension funds, which have so far not invested in this asset class. Catastrophe bonds offer comparatively attractive returns on transparent risks. Investors also increasingly recognise the diversification effect in their portfolio, as these bonds are not correlated with their other risks,” said Board member Thomas Blunck, who oversees Munich Re’s Risk Trading Unit. “All in all, the market conditions for insurance securitisations – both for sponsors and for investors – have become even more attractive.”

With over $5 billion of catastrophe bond issuance in 2010 and close to $4 billion in maturities the market did grow over the full year leaving the outstanding capital in the market at about $13 billion. Munich Re note that spreads rose in the first half of the year on the trepidation associated with the forecasts for an active hurricane season in the Atlantic. In the second half of the year those spreads dropped (partially due to the lack of landfalling storms on the U.S. coastline). Over 2010 as a whole the required return on cat bonds fell by around 30%.

Two positives Munich Re mention, which we echo as we believe these two points are vital to a healthy market, are:

  1. The share of the market held by major traditional investors rose from 5% in 2009 to over 20%. It’s vital to have the involvement of large investors who can pump capital into the sector and held to stimulate demand for issuance.
  2. The range of risks issued over the course of the year broadened. Again we feel it’s vital that a good mix of risks are issued both to satisfy investors demand for diversification and to ensure the markets risk capital is not tied up in a single geographically located peril (such as U.S. hurricane risk).

Rupert Flatscher, head of Munich Re’s Risk Trading Unit said; “We anticipate a further rise in the volume of issues for 2011. Although favoured by the low interest-rate environment in the capital markets, this increase is also largely due to a larger circle of investors. We are particularly pleased about the growing interest of traditional investors such as pension funds, as they contribute to a sustainable and more stable development of the still young securitisation market for insurance risks”.

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Tom Cangemi January 29, 2011 at 1:28 am

I was curious if any Catastrophe Bond has ever been triggered due to loss thresholds being exceeded – giving downside loss to investors?

Not counting Lehman Bros. bankruptcy style default – but a real catastrophe loss to investors.

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