Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Extraordinary deal flow has significant impact on secondary market for insurance-linked securities


A strong flow of new catastrophe bond deals coming to market during March continued the trend for an active primary insurance-linked securities market (ILS) and continued to have an impact on secondary market ILS prices, according to Swiss based investment manager and private bank Clariden Leu in their latest fund performance report. It puts this Q1 of 2012 at the top of the list for the most active Q1’s on record, with close to $2 billion worth of ILS and cat bonds brought to market in 12 transactions, with 9 of them completing in the quarter.

New cat bond deals which began marketing in March included Combine Re Ltd. (Series 2012-1), Blue Danube Ltd. (Series 2012-1), Akibare II Ltd. and Pelican Re Ltd. (Series 2012-1). Only Combine Re actually completed in the quarter though, with the others officially rolling into Q2, but still the total issuance achieved in Q1 reached $1.493 billion. Clariden Leu’s report highlights that activity in Q1 was way above the normal 3 to 5 transactions that we tend to have seen in recent years.

This extraordinary deal flow in the primary market has had a significant impact on the secondary market for ILS though, and this continued to be evident through March as negative price movements remained the dominant trend. Clariden Leu provide a useful chart which clearly shows the tendency for secondary market cat bond and ILS prices to decline at times of high primary market ILS issuance. It’s a great way to visualise something we have written about many times in recent months, a recent article can be found here. Clariden Leu say that the sensitivity of the market to large fluctuations in new issuance is understandable given the overall size of the market, which they put at $10.7 billion (non-life only we believe) at the end of 2011 (see our recent article discussing the current size of the market here). The chart from Clariden Leu is reproduced below.

ILS price returns vs new issuance volume

ILS price returns vs new issuance volume

Clariden Leu say that they expect the steady deal flow to continue into the second quarter and that the market remains optimistic that primary issuance will continue to flow. They do however note that they expect April to be slower in terms of issuance, something we are noticing with just one cat bond (Everglades Re Ltd. (Series 2012-1)) actively being marketed right now, but they say that there will likely be a second wave of new issuances prior to the U.S. hurricane season. They say it will be interesting to see how much firm investor interest remains in the market and whether new investors will be drawn to the ILS space by the attractive spread levels.

On the secondary market, Clariden Leu say that if their prediction for primary issuance to accelerate again as we approach the U.S. hurricane season comes true we could see another increase in negative pressure on secondary prices. They caution that prices may remain volatile over the next few months as new deals come to market and fund managers continue to revise their portfolios.

Note: Clariden Leu’s insurance-linked funds and the portfolio management team will soon be transferred to LGT Capital Management. More details can be found in this article.

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