Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Secondary cat bond market active in September, Mariah Re bonds the main losers


September saw another active month of activity in the secondary market for catastrophe bonds although not all of that activity resulted in trades as some investors failed to make the acquisitions they sought and place their excess capital. There were no new primary market cat bonds at all in September, which tends to be the case during most years as all eyes are on the Atlantic hurricane season and industry events such as Monte Carlo.

According to some monthly insight from Plenum Investments, the Zurich based investment manager with a focus on insurance-linked securities, the first half of September saw a lot of buying interest from investors. These were thought to be investors with excess liquidity, say Plenum, we assume from previous cat bond maturities, who were seeking to deploy that capital back into the insurance-linked securities markets. This demand was met with little if any selling opportunities, says Plenum, as investors were holding their positions. Yet another sign that demand is outstripping supply in the cat bond market, particularly in diversification opportunities.

In a total reversal, the second part of the month saw significant interest in selling positions, which Plenum put mainly down to increasing expectation of an active deal pipeline coming during Q4. Investors often try to offload positions in advance so as to free capital up for new issuances. It’s expected that Q4 will be active and we’ll see a number of diversification opportunities with risks such as European windstorm coming to market in larger quantities.

Cat bond pricing saw some movement during September, with U.S. hurricane cat bonds leading the way with prices increasing on average 2.1% during the month as they continue their expected seasonal price fluctuation. U.S. earthquake cat bonds remained flat during September, European windstorm bonds lost an average of 10 basis points and Japanese typhoon bonds lost about 0.5%.

The big losers during September were U.S. severe thunderstorm exposed cat bonds, meaning the Mariah Re 2010-1 and 2010-2 deals, which lost on average 50% over the month according to Plenum. That insight helps to support our analysis that Mariah Re pricing caused the dip in cat bond indices in the last fortnight. Plenum agrees with our assessment that as much as 65% (or $65m) of the Mariah Re Series 2010-2 cat bond investors principal is already lost. With losses still developing on Mariah Re it seems likely that losses could eat into the Mariah Re Series 2010-1 cat bond as well, we’ll keep you posted as more information becomes available.

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