Swiss Re Insurance-Linked Fund Management

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Reinsurance price increases influencing new catastrophe bond prices


Many reinsurers have been reporting price increases in their catastrophe renewal business for 2012 particularly in regions which have been affected by the high insured losses of 2011. According to Zurich based Plenum Investments, an investment manager with a focus on insurance-linked securities, the strong demand for catastrophe reinsurance has in some cases increased prices by as much as 15%. In their latest monthly report Plenum also highlight that these reinsurance price increases are having an influence on the catastrophe bond market.

The increase in reinsurance prices will have an influence on prices in the cat bond market and Plenum have already observed price increases feeding through into recent new cat bond deals. Specifically Plenum refer to the recently completed Ibis Re II Ltd. (Series 2012-1) U.S. hurricane cat bond, which was issued in January for sponsoring U.S. specialty insurer Assurant. If you compare the pricing to their 2010 cat bond, Ibis Re Ltd. (Series 2010-1), the 2012 deal has been priced up by 30% according to Plenum. It will be interesting to see whether any further reinsurance price increases at the mid-year renewals have a similar effect.

Plenum’s monthly report also discusses the decline in price returns in the secondary market (which we’ve covered in more detail here and here). They saw prices decrease across all perils except for European windstorm cat bonds which saw a modest increase. Prices on U.S. hurricane cat bonds decreased on average by 1%, on U.S. earthquake cat bonds prices decreased on average by 0.5%, Japan typhoon and earthquake cat bonds decreased by about 0.2% whereas European windstorm cat bonds increased by about 0.2%. They conclude that this trend will continue for the next few weeks after which secondary market trading activity should bounce back and prices recover.

Plenum expect the active pipeline of new issuance to continue throughout the rest of Q1 and note that as of the 31st January 2012 the size of the outstanding cat bond and ILS market was $13.3 billion, up from $11 billion a year ago. That’s good growth and we hope to see the market hold onto that $2 billion increase this year.

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