Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Catastrophe bond market off to unusually lively start in 2012


The catastrophe bond market has been particularly active during the month of January 2012, with an extraordinary number of new issuances coming to market, according to Swiss based investment manager and private bank Clariden Leu in their latest fund performance report. Five new cat bonds with an issuance volume of close to $800m came to market in January, an unusually high number of deals for January which is usually a very quiet month for primary cat bond or insurance-linked security issuance.

January saw the following cat bond and ILS deals successfully come to market:

Those five deals totalled $793m and gave investors a great chance to deploy capital at the start of the year. While this level of issuance is unusually high for January, Clariden Leu said it is clearly a response to the very high investor demand that has been seen since the second half of 2011.

To give you an idea how unusually high this level of issuance is for January we took a look at our Deal Directory to see how many cat bond and ILS deals usually come to market in the first month of the year. Our Deal Directory currently contains 247 transaction entries. Of those there are very few which were issued in the month of January. We have two listed in January 2001 (PRIME Capital CalQuake & Euro Wind Ltd. and PRIME Capital Hurricane Ltd.), two listed in January 2007 (Calabash Re II Ltd. and Vita Capital III Ltd.) and just one listed in January 2010 (Foundation Re III Ltd.). So for five deals to come to market in Januaryalone this year is extremely unusual and suggests that the outlook for the year ahead is positive.

Since January ended two more cat bond transactions are actively being marketed; Munich Re’s Queen Street V Re Ltd. and most recently Liberty Mutual’s Mystic Re III Ltd. (Series 2012-1). Both of these could upsize if pricing is right to encourage investors to the deals, but whatever size they complete at the market will have achieved a record first two months of issuance at over $1 billion.

During January Clariden Leu saw the continuing trend for secondary cat bond prices to be depressed due to the high volume of primary issuance. Demand for outstanding cat bond notes from investors has subsided as they chose to deploy capital into new transactions. This has led to neutral to negative valuations on outstanding cat bonds and resulted in moderate performance for the Clariden Leu funds in January. You can clearly see this trend in our coverage of the Swiss Re cat bond indices from earlier this week.

Investors are taking advantage of the brisk primary market issuance of new cat bonds to acquire diversifying positions. Clariden Leu themselves say that they have been seeking out non-U.S. hurricane opportunities to help improve the diversification of their portfolio. This will also likely put them in a good position to take advantage of any U.S. hurricane deals that come to market in Q2, historically the time of year (pre-hurricane season) when these deals come to market.

Clariden Leu expect more new cat bond and ILS issuances to come to market in Q1 but they have noticed that investor interest is beginning to lessen, particularly for deals with U.S. hurricane exposure. They expect the spreads on new cat bonds to widen compared to 2011 prices as investors become more selective with their investments. Of course one factor that could combat this is the appearance of new capital to the marketplace, something that seems to be a consistent feature these days.

Secondary cat bond and ILS prices should begin to stabilise by the end of Q1 according to Clariden Leu as they expect new issuance to slow and a number of outstanding transactions to mature. At that point they expect the returns on their funds to improve. Overall they remain optimistic with respect to the issuance pipeline over the next few months, sentiment that is reflected by almost all market participants we have spoken to recently.

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