Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

December was quiet in the catastrophe bond market due to hurricane Sandy


Both the primary and secondary catastrophe bond markets were subdued in December as the markets participants continued to assess the fall-out and industry losses that hurricane Sandy had caused. Many insurers and reinsurers had been forced to put their planning and purchasing of U.S. hurricane reinsurance and retrocession on hold and this is thought to have affected primary cat bond issuance and also secondary cat bond trading volume.

In their latest monthly update, Swiss based insurance-linked securities (ILS) fund manager Plenum Investments said that it believes insurers and reinsurers had put their capital management, planning and execution for U.S. hurricane risk on hold. We’ve heard that some renewal programmes have been a little delayed by cedents looking for more clarity around the eventual industry loss total that we’re due to hear from PCS later this month.

Plenum said that the looming spectre of hurricane Sandy losses caused the primary cat bond market to be slower than expected in December. It’s possible that some transactions have been delayed until the sponsors better understand the industry loss estimate and their own ultimate net losses from Sandy. With the U.S. hurricane season not due to begin until June there is plenty of time for these contracts to be covered and any U.S. hurricane cat bonds to be issued well in advance.

We could be looking at a flurry of U.S. hurricane cat bonds during the first-half of 2013 thanks to hurricane Sandy and as a number of large deals from regular sponsors are also due to mature. This could have an impact on capital availability if a large amount of U.S. hurricane risk attempts to be issued in a short period, although this will also give an opportunity where new capital could enter the market.

Similarly to the cat bond primary issuance market the secondary trading market was also relatively quiet in December, said Plenum. It cites the reasons for this as being investors continuing their efforts to understand the impact, or otherwise, of hurricane Sandy on their portfolios and that demand for diversifying bonds is currently much greater than supply. Diversifying deals could be essential in 2013 if we do end up seeing a large amount of U.S. hurricane risk issued this year. Plenum itself holds positions in two of the cat bonds which had been seen to be at risk from Sandy; a 5% position in the East Lane Re IV Class B notes and a 1% position in the Long Point Re III 2012-1 Class A tranche, so it too awaits further clarification of Sandy losses with great interest.

Pricing wise, Plenum said that pure U.S. hurricane catastrophe bonds gained on average 1.4% during December helped by bonds which saw Sandy mark-to-market losses bouncing back strongly. U.S. earthquake, Japan earthquake and Japan typhoon cat bonds saw flat pricing during the month while European windstorm cat bonds saw a small rise of about 0.8% which is in line with seasonal price trends.

Plenum Investments ILS fund saw impressive gains in December, rising 0.95% in the USD class. For the year of 2012 the fund rose a very healthy 6.51%.

Plenum Investments said in another recent report that it hopes for another strong year of catastrophe bond issuance in 2013, with $6 billion to $8 billion possible. It doesn’t expect too much influence on cat bond risk premiums from the reinsurance market, as reinsurance renewals have been largely flat, which should help to keep cat bonds competitively priced.

Plenum said that there continues to be a strong supply of capital market capacity for the cat bond market, as evidenced by recent deals which have upsized, pressure on cat bond premiums and strong interest from new investors. Cat bonds continue to offer good compensation for the assumed risks, excellent diversification properties and can be used in portfolios to offset the continued risks across more traditional investment classes.

Register today for ILS NYC 2023, our next insurance-linked securities (ILS) market conference. Held in New York City, February 10th, 2023.

Artemis ILS NYC 2023 - Insurance-linked securities conference in New York City

Get a ticket soon to ensure you can attend. Secure your place at the event here!

Print Friendly, PDF & Email

Artemis Newsletters and Email Alerts

Receive a regular weekly email newsletter update containing all the top news stories, deals and event information

  • This field is for validation purposes and should be left unchanged.

Receive alert notifications by email for every article from Artemis as it gets published.