The second of our prediction pieces, where we ask a leading participant in the insurance-linked securities, catastrophe bond and reinsurance convergence sectors to give us their opinion on how the sectors will evolve in 2012, saw us speak with Brad Chance, Co-founder of Petra Haven Capital LLC, an investment manager with a focus on the cat bond, ILW and collateralized reinsurance space. We asked Brad for his thoughts on where the markets were heading in 2012.
His response follows below.
The Alternative Transfer Reinsurance Market for 2012 has three major underlying themes.
1) A demand for capital based on the loss experience of 2011
2) A great deal of dependency on the European Debt Crisis
3) Lower returns on reinvestment income from maturing assets.
The catastrophic events of 2011, along with continued soft market pricing in the overall insurance market have led to a net capital outflow and created a situation where capital is in great demand prior to 1/1 renewals. However this demand has subsided the first few weeks of the year, and it appears that reinsurer capital is currently adequate. That said this capital could be in even greater demand depending upon the circumstances of the European debt crisis.
The lack of correlation to the debt crisis will make Cat Bonds, ILW’s & Collateralized Reinsurance assets very attractive from an investment point of view. While at the same time an escalation of the crisis or a default by one of the major EU countries would more than likely have the same effects that the 2008 financial crisis had on the overall capital markets.
That said the first quarter should be a fairly active time period for issuance of cat bonds, and other alternative risk transfer vehicles, and issuance should be within 10% of what occurred during fourth quarter 2011.
The lower investment income or reinvestment from maturing assets is going to increase the overall demand for capital and put upward pressure on rates.
Finally as hurricane season approaches a great deal of thought will be put into Florida from a standpoint of how long can the state go without being hit by a storm? This question and the lack of a major storm on the east coast for 3 + years (ex Irene) will really drive the market.
Our thanks go to Brad for his time and thoughts on how the market will perform during 2012.