Swiss Re Insurance-Linked Fund Management

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ILS funds, flooded with cash, drive ILS and cat bond market to record size


At the end of the third-quarter the total size of the outstanding catastrophe bond market reached a record level thanks to ILS funds being flooded with cash from large inflows of new capital from asset managers, says the world’s largest reinsurer Munich Re in its latest quarterly insurance-linked securities (ILS) market update on Q3 2012. Munich Re counted $4.1 billion of new issuance in the first three-quarters of the year helping the outstanding cat bond market grow to $14.8 billion for the first time.

Munich Re says that the low yield environment in the global debt markets has continued to drive substantial capital inflows from large asset managers into the ILS and cat bond market, mainly into dedicated catastrophe funds. The significant cash positions of these ILS funds has helped to drive demand for new issuances, helping the volume of new cat bonds to outstrip maturities. New issuances in 2012 have outstripped maturities by just over $2 billion. There were no maturities at all in Q3 which allowed the market to achieve this record size.

Outstanding and Issued Catastrophe Bond Volume

Outstanding and Issued Catastrophe Bond Volume - Source: Munich Re Q3 2012 ILS market report

There is just over $1 billion of outstanding cat bonds scheduled to mature in Q4 and we have already seen more new issuance this quarter so far, including the latest Residential Re cat bond which now it has upsized will help the outstanding cat bond market grow even further by the end of November. We should easily see a cat bond market larger than $15 billion by year-end and $16 billion is highly possible if all planned transactions come to market in time, although we understand some may move into Q1 of next year due to being delayed post-Sandy.

Munich Re’s report notes that Q3 issuance was marked by strong demand from investors which helped deals to upsize and price below the expected range. Their own Queen Street VI Re Ltd. saw strong investor demand which enabled them to lock in a risk spread below the expected price range. The California Earthquake Authority sponsored Embarcadero Re Ltd. (Series 2012-2) which doubled in size due to demand from investors for California earthquake risk and the deal was oversubscribed. Finally Hannover Re’s Eurus III Ltd. benefitted from investors demand for diversification and priced at a new low for European windstorm, around 90 basis points below historic pricing levels for that peril. Munich Re puts the low pricing that Eurus III achieved down to that peril having become a much smaller part of the market, at just 13% compared to 19% back in 2010, which has forced investors to accept lower risk spreads.

Looking ahead, Munich Re forecast a strong end to the year for the ILS and cat bond market with a focus on non-U.S. issuances. That would be welcomed by investors looking to deploy capital as the lack of diversifying issuances has been a constant discussion point this year. Munich Re expects international cat bond sponsors will take advantage of the current market environment and investor demand for diversification during Q4. Munich Re expects pricing to remain attractive, particularly for U.S. quake risks or non-U.S. perils.

Catastrophe bond capacity by peril

Catastrophe bond capacity by peril - Source: Munich Re Q3 2012 ILS market report

Interestingly Munich Re are forecasting over $6 billion of issuance for 2012 as a whole and a market size of $16 billion by year-end. For the market to achieve $16 billion there needs to be around $1 billion more issuance this year on top of all the deals listed in our Deal Directory. We already have $1.2 billion of cat bond volume listed in Q4 so far, but with just over $1 billion of maturities due this quarter the market will need to pick up as we near year-end. That would suggest between three and five more cat bonds before the end of the year which would be welcomed by investors.

Looking even further ahead into 2013, there are $2.825 billion of maturities due in the first half of the year but Munich Re says that most are from repeat U.S. sponsors and are likely to be renewed as they form a strategic part of the sponsors risk transfer arrangements. Munich Re says that if the Q4 pipeline brings more diversification opportunities they expect a renewed appetite for U.S. perils throughout the first half of 2013.

You can download a copy of the report from Munich Re via the Risk Trading section of their website.

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