Fund managers and investors would welcome new insurance-linked security or catastrophe bond deals

by Artemis on June 27, 2012

This short article is a call to all catastrophe bond and insurance-linked securities issuers, sponsors and those tentatively looking at the possibility of becoming either in the near future. If you’re thinking about issuing a diversifying peril cat bond, or a life, health, mortality or any other risk-linked security (except U.S. hurricane related), now is an ideal time if you want to capitalise on significant investor appetite for new transactions.

We’re now into the 2012 Atlantic hurricane season and typically the primary cat bond and ILS market see’s little in the way of issuance until the third quarter begins. Sometimes we see a European windstorm, Japanese peril, life or health cat bond or insurance-linked security deal or two come to market during the summer, but it’s rarely enough to provide meaningful capacity for investment capital. We’re told that there are a couple of deals tentatively sitting on the side lines but when they’ll see the light of day is currently unknown.

The fact is that right now could be a particularly good time to bring a cat bond or ILS deal to market for issuers and sponsors. Investors and ILS fund managers are in need of deal flow to help them take advantage of capital sitting on the sidelines of the market. Some ILS fund managers are also in need of deal flow to help them achieve the balance they require in their portfolios during the U.S. wind season.

We’ve spoken with a number of smaller ILS fund managers in recent days who would love to see any kind of diversifying deal come to market so they can reduce their reliance on the secondary markets for portfolio optimisation purposes. Fund managers have been forced to use the secondary markets as a way to gain some last-minute portfolio diversification in advance of the hurricane season. This can at times be more costly and also require more effort than investing in new primary issuances.

Even the larger specialist ILS investment funds are looking for and would welcome new opportunities. LGT Capital Management’s Insurance-linked Strategies team are one of the largest dedicated investment managers in the ILS and cat bond space and they discuss the shortage of opportunities in their latest monthly managers report. The LGT ILS team’s report says that one of the reasons July through September is traditionally quiet in the market is that new deal structurers avoid promoting transactions at this time in case they put additional price pressure and unwanted volatility on investor interest. Despite this they say that they would “clearly welcome a few new offerings that are exposed to perils other than US wind risk.”

It may well transpire that the market has to get over any fears of putting pressure on pricing or increasing volatility during these summer months as if they continue to hold transactions back they could send investors to other asset classes where they can effectively deploy their capital. This summer may remain quiet, as has traditionally been the case, but if we continue to see investor interest at the levels seen earlier this year then structurers may be forced to continue to bring deal-flow to market as investor and manager pressure will be focused on this. This could make it a very good opportunity right now for those looking at sponsoring deals and this become another factor which helps to loosen the ILS and cat bond markets ties with the pricing of more traditional reinsurance.

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Siyar "The Great" Bahadurzada June 29, 2012 at 8:32 am

Come on…… increased appetite from the ILS investment community does not mean that sponsors will get a good deal for a non-diversifying issuance. If that was the case sponsors would be issuing masses of non-US exposed placements. The fact that these aren’t coming to market is a testament to the high spreads that are consistently applied.

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