Strong appetite for insurance-linked investments continuing into 2013: LGT

While primary issuance of catastrophe bond and insurance-linked securities has not been so strong at the start of 2013 compared to a year earlier, it appears that a strong appetite for insurance-linked investments looks set to be a feature of the market in 2013. In contrast to the primary market which was slow in January, the secondary market for trading cat bond positions has been relatively active thanks to strong demand from investors.

The latest monthly insight from Swiss based ILS investment manager LGT Insurance-Linked Strategies suggests that investors appetite for cat bonds and insurance-linked investments has carried through the momentum it built up in Q4 of 2012 into the start of 2013. The ILS investment manager has noticed high demand for ILS positions on the secondary market which has helped contribute to recent price gains and stable positive returns for its funds in January.

LGT said that inflows of capital to the ILS space continue in the first quarter of 2013 and it sees no weakening in investors appetite for ILS and cat bonds. Of course this strong demand is resulting in a ‘demand outstripping supply’ situation as we’ve written recently here, meaning that competition for secondary marks can be high and some investors find opportunities harder to come by.

Capital inflows, combined with cash returned from maturing cat bonds, has also led to some ILS fund managers having large cash components to their funds which they are currently struggling to put to work. This means new primary cat bond issuance is likely to be extremely well received at this time, something that the latest cat bond, Caelus Re 2013 Ltd., could well benefit from as the first deal in the market of late.

The slower January has given ILS fund managers a chance to take stock and focus on diversification, where secondary positions have been available to acquire. LGT itself invested in the Vitality Re IV Ltd. medical benefit linked ILS and also undertook a number of secondary trades focusing on improving diversification within its portfolio and aligning the cash portion of the fund with targets.

Looking forward, the LGT ILS update says that deal originators are promising a healthy amount of new ILS issuances will come to market in the first quarter. LGT notes that February is typically where cat bond issuance season kicks off, although we have only seen the one deal in the market this month so far.

The LGT update says that the focus is expected to be on U.S. natural perils in Q1 2013, likely due to the large amount of maturing transactions and the forthcoming U.S. wind season, however the update notes that rumours suggest a number of diversifying peril deals will come to market too.

On the investor appetite side, LGT expects robust investor interest in cat bonds to continue and that this could result in premium rates coming under pressure. However pricing on ILS is currently quite firm, according to the ILS manager, and so a slight decrease even compared to 2012 levels should not affect the interest investors are showing. LGT expect this demand for ILS paper will remain high over the short-term and say that this will contribute to expected stable performance of its funds over the coming months.