Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Catastrophe bonds increasingly in favour as investors avoid wider financial markets


Investor interest in catastrophe bonds, other types of insurance-linked securities and risk or reinsurance linked investment opportunities just keeps growing this year. The news from the broader financial markets continues to look depressing and investors are increasingly seeking out safe-havens to deposit their capital in. Investment opportunities which have a low correlation to the broader financial markets are increasingly in favour and that means the buzz about cat bonds is growing in investor circles.

This article published in the Washington Times discusses the reasons for the attractiveness of catastrophe bonds to investors and quotes Judy Klugman, Swiss Re’s managing director and head of insurance-linked securities distribution, as saying that “Investors are just generally nervous about everything that’s going on in the financial world. Right now, they think this is a safe haven. They don’t know where else to put their money.”

That echoes what we are hearing from many investors who are new to the world of insurance-linked securities and catastrophe bonds but are seeking a way to access the asset class. The problem many are facing is the lack of opportunity to deploy capital into cat bonds as many of the funds have stopped taking new investment capital and deal flow has yet to pick up after the downturn in issuance seen during much of this year.

In an effort to reduce spreads on cat bonds making it easier to pay the interest investors want to attain, the article says that Swiss Re are looking to increase the size of the market. Other efforts are underway to achieve this goal, from attempts to make issuance more cost-effective and simpler, to privately issued transactions which avoid some of the costs to efforts to bring new classes of risk to the ILS market. These various initiatives are all helping to not just grow the ILS and cat bond market but also to attract new sponsors, investors and intermediaries who may not have looked at the market seriously before.

There is a fantastic opportunity right now for sponsors to issue cat bonds at reasonable, multi-year fixed costs (as proven by some recent transactions) and a chance to secure ever larger amounts of cover as the number of active investors and investment funds seeking opportunities in the asset class grows. Some regular cat bond sponsors we’ve spoken with suggest they may hold off to see how reinsurance rates change at the January renewals. However, sponsors should not hold off on issuing deals for too long as investors are not going to hold onto their capital waiting for opportunities to invest in ILS to arise forever. Some frustrated investors we’ve spoken with are considering deploying capital into retro and collateralized reinsurance vehicles or other assets with low levels of financial market correlation and there are plenty of those types of opportunities around right now.

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