Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Despite four new catastrophe bonds during July, investor demand for ILS remains strong


Despite the issuance of four new catastrophe bonds, which brought close to $700m in additional investment assets to the insurance-linked securities market, demand remains strong amongst investors seeking to access the sector according to investment manager Clariden Leu in their latest monthly fund managers report.

The new transactions which all involved non-U.S. wind risks offering diversification opportunities to the hurricane heavy market have not been sufficient to satisfy investor demand at a time when cat bonds (and insurance-linked securities) are gaining a profile as a good investment with low correlation to the wider financial markets and sovereign debt issues.

The four transactions, Queen Street III Capital Ltd., Pylon II Capital Ltd., Embarcadero Re Ltd. and Vita Capital IV Ltd. (details of all four can be found here), have come at an unusual time of year when primary market cat bond issuance is generally quiet due to the Atlantic hurricane season. This has been well received by seasoned investors who have funds to invest after a large amount of outstanding cat bond capital matured in recent months, while some new entrants to the market struggle to access oversubscribed deals.

Clariden Leu suggest that sponsors have been taking advantage of this investor demand to bring their deals to market while the appetite for new risk is strong. They say that the market is currently optimal for sponsors seeking to securitize risks and this has been proved by spreads on all recent transactions closing at the tighter end of pricing guidance. Spreads have been coming very close to the risk premium for traditional reinsurance making cat bonds a particularly competitive option at the moment. Clariden Leu say that this could be attractive to some potential sponsors who are put off by the price and cost of issuing a transaction normally and this price competitiveness could help to increase issuance over the rest of the year.

Of course the tighter spreads can be unattractive to some specialist investors, Clariden Leu included, who declined to invest in some of the recent cat bonds due to the premium being deemed insufficient for the risk. However the lower premiums are proving attractive to institutional investors such as pension funds who are seeking safe(r) havens for their funds at a time of market volatility.

Secondary market cat bond trading remained fairly active in June according to the report as managers sought to revise and rearrange their portfolios to take on notes from the new issuances. Prices in the secondary market remained stable or increased slightly, helped by the so far benign U.S. hurricane season.

Clariden Leu expects investor demand to remain strong over the coming months as long as there are no major landfalling hurricanes and cat bond prices are expected to remain firm. They anticipate stable returns from their fund over the next few months as long as there are no major insured losses which impact any cat bonds.

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