Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

$7 billion of catastrophe bond issuance possible in 2012


The catastrophe bond and insurance-linked securities (ILS) market looks like it could be on for a bumper year in 2012, according to the positive sentiment from speakers at the recent SIFMA ILS conference in New York. We attended the conference to hear leading participants from the market discuss the issues facing the cat bond and ILS sector and what they felt the year ahead would bring. The general sentiment was positive and speakers from both the investment and issuing sides of the market were in agreement that 2012 could be a very good year.

To date in 2012 we have nine new cat bond and ILS transactions listed in our Deal Directory. Many of these transactions have now completed and some have upsized as issuers have taken advantage of investor demand and the attractive returns that some of these transactions are offering. In total the nine deals we have listed come to $1.493 billion of issuance already, which is extremely good for this stage of the year and up on the issuance by this time of 2010. Eight of these transactions are natural catastrophe bonds and all involve repeat sponsors, while the ninth is the latest medical benefit ratio deal from Aetna. Six of the natural catastrophe bond deals include U.S. hurricane risk in their mix, but only one is a pure U.S. wind cat bond, so there is some diversification on offer to investors. Diversification opportunities have been helped by the latest California Earthquake Authority cat bond and a Japan quake deal involving Zenkyoren.

So the start to this year has been extremely positive for the cat bond and ILS market but will it continue? Dr. John Seo, Co-Founder and Managing Principal at ILS investment manager Fermat Capital Management, was one of the SIFMA events most positive speakers, making a number of interesting points on the prospects for the market in 2012. He said that recent months have seen a significant inflow of new investor capital into the sector, as interest continues to grow amongst institutional and professional investor circles. Dr. Seo estimated that between $3-$4 billion of new capital has flowed into the market in recent months. He noted that it is difficult to tell how much of that ends up in cat bond investments but he felt that there has been a strong focus on cat bonds and ILS from investors and that this was likely to continue. “Cat bonds are here to stay’ and “Cat bonds are re-entering their growth phase” were two other positive comments from John Seo during his first panel discussion of the event.

On the potential issuance volume that the market could see during 2012 Dr. Seo was among the most positive speakers at the event, saying that he believed that the cat bond issuance pipeline for the first half of 2012 could be as much as $4.5 billion. The size of the pipeline does not always translate into completed transactions, but if that number is achieved 2012 could see a significant volume of issuance (2011 only managed around that figure over the full year). He estimated that given the amount of investor capital flowing into the market, if conditions in the market remain stable and there are no events which impact confidence then the market could easily see $7 billion of issuance in 2012.

Other speakers echoed this positive sentiment on the market and the general feeling from attendees was that the cat bond and ILS market could see very positive growth in 2012. Swiss Re Capital Markets Judith Klugman also discussed the potential for the first half of the year to have a much larger than average pipeline of deals coming up and believed that 2012 would be a good year too. Other attendees we spoke with from various ILS investment funds, deal service providers and issuers all seemed in agreement that there was a good chance for growth this year.

There was some concern about concentration of certain risks in the market, primarily U.S. hurricane, and diversification (or sometimes lack there of) is a cause for concern among some of the investors who were present. However one panel did discuss the potential for new types of risk to come to market and while there was no firm agreement on what these risks would be everyone believed that there was potential for new risks to be issued now the market is maturing.

Shiv Kumar, Managing Director at Goldman Sachs, spoke on the topic of issuers perspectives on the market and discussed the fact that unrated tranches of cat bond notes are becoming more common as issuers seek cover for riskier layers of their re/insurance programs. He noted that the market has become riskier over the last few years, but the discussions we had on this topic with attendees suggested that investors were comfortable with this as they increased their knowledge and understanding of the sector. This could also be a trigger for growth in the market as issuers can transfer more of the higher risk layers of their business to the capital markets. We’ve covered this issue previously here.

So overall a very positive industry event which left us with the feeling that participants are looking forward to the year ahead and seeking where the market can get to in terms of issuance and diversification. This aligns with sentiment from other large participants in the market such as Axa Investment Managers who recently said the market could achieve $6 billion this year.

We’ll have to wait and see but given the comments we heard and discussions we had, those interested in the cat bond and ILS sector should get ready for the busy start to 2012 to continue.

If you want to have your say on what you feel issuance could reach in 2012 then either vote in our poll here or you can comment below.

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