Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Peak catastrophe bond issuance months disappoint


The months of May and June are historically the peak period for new catastrophe bonds as issuers seek to lock in a source of reinsurance cover in advance of the U.S. hurricane season. This year has disappointed, says investment manager Clariden Leu in their latest monthly managers report, with only two new issuances from Johnston Re and Residential Reinsurance 2011 during May totalling $452m.

One cat bond has completed in June, the recent $100m Loma Reinsurance Ltd. issuance from Bermuda reinsurer Argo Re. Last year, May and June saw eight cat bonds complete totalling $1.95 billion according to our Deal Directory. 2009 saw just three May and June cat bonds totalling just under $400m (due to the fallout from the financial market crisis) while 2008 saw nine totalling $1.927 billion. So this year has been disappointing for new issuance, although after the catastrophe in Japan in March and the fallout on exposed cat bonds this is understandable and it’s encouraging to see that issuance was no worse than in 2009.

The main concern is that the lack of new issuance is now forcing investors to look elsewhere for ways to put their capital to work. The cat bond market has shrunk in the past year as maturities have outpaced new issuances leaving opportunities to invest in catastrophe linked securities as scarce and forcing investors to look at other opportunities such as private market ILS deals, sidecars and catastrophe linked derivatives.

In their monthly report Clariden Leu say that secondary market trading was fairly active during May, although typically only for small volumes. They see investors tending towards a buy and hold strategy on outstanding cat bonds as they seek to keep a foothold in the asset class at a time of limited new investment opportunity. Pressure on the prices of U.S. hurricane exposed bonds continued in May, typical of the run up to the hurricane season. They expect price decreases will be kept in check by significant investor demand and say they expect stable performance from their ILS funds.

Clariden Leu see a dislocation in the secondary market at the moment as investors seek to hold their positions and say this has created a ‘widening gap between bid and ask prices’. This has caused a dislocation they say as indicative prices from market makers differ from the actual prices at which trades are completed.

Clariden Leu say that they have heard of two new issuances which could come to market during June and July. One of these was likely the Loma Re deal which completed last week, while the other is unknown. They say that they expect issuance to be quiet until the 4th quarter, with issuers holding off until the end of the hurricane season. This could herald a 4th quarter flurry of issuances as by that point of the year there will be significant capital waiting to be deployed from investors.

If any deals come to market over the next few months they are likely to be diversifying cat bonds not exposed to U.S. hurricane risks. These should be welcomed by investors as the volume of outstanding cat bonds is extremely top heavy with U.S. hurricane risk at the moment. Given the rise in reinsurance rates which we are beginning to see in certain regions and lines of business this could make cat bonds an attractive option for issuers seeking to cover risks around the rest of the world and other perils.

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