Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Insurance-linked securities investors hold their positions in June


As the primary catastrophe bond market slowed in June, with only a single cat bond transaction being issued  by Loma Re Ltd., the secondary market continued to be calm and saw insurance-linked securities investors holding onto their positions in response to the lack of new investment opportunities.

Plenum Investments, the Zurich based investment manager continues to highlight the lack of supply in their latest monthly fund performance report (you can read about their May update here). Their fund continued to recover some of the ground lost earlier this year after the events in Japan, gaining 40 basis points during the month of June.

They attribute most of their funds gains to a tactical U.S. hurricane allocation that they hold. Mark to market increases in Japanese earthquake exposed cat bonds continue to be seen within their funds allocation and they expect this to continue. Their U.S. tornado exposed cat bond allocation saw some mark to market losses during the last month but Plenum expect this to recover over the coming weeks although the downgraded Mariah Re Ltd. cat bond is not out of the woods quite yet.

Plenum’s updates are always insightful and this latest one includes some interesting commentary on secondary market catastrophe bond prices. During the month of June Plenum have seen U.S. hurricane exposed cat bonds gain half a percentage point which they say is in line with being in the hurricane season. U.S. earthquake bonds remained flat, European windstorm exposed cat bonds were up on average by 30 basis points which Plenum put down to the current demand for diversifying perils. Japan typhoon bonds rose around 20 basis points. Japanese earthquake exposed cat bonds continued to gain rising by 2% in value in the last month, while the U.S. tornado exposed transactions cancelled that out by losing 2%.

With no sign of any new cat bond transactions on the horizon it’s expected that July will be another calm month as bonds generally gain and trading remains light. Investors are actively seeking to diversify their portfolios at the moment so any opportunities that arise are expected to be very well received. As we wrote last week, the cat bond market is currently U.S. hurricane top heavy and as a result investors are receptive to diversification opportunities.

A side effect of the lack of primary market activity and the holding of positions in the secondary market that we are hearing from investment market sources, is that investors seeking to enter the insurance-linked securities market for the first time are finding the task extremely difficult. opportunities are few and far between and much of the outstanding cat bond assets are being held by investors already experienced in the market. This is leading new investors to seek other opportunities to gain exposure to catastrophe risk through investments in reinsurance vehicles such as sidecars or through derivatives such as industry loss warranties. It will certainly be interesting to see how the next cat bond to be marketed is received, this could be an ideal time for an issuer seeking to bring a large and diversifying deal to market.

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