Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Swiss Re publishes first insurance-linked securities market update


Swiss Re have today published their first half yearly update on the insurance-linked securities and catastrophe bond market. The report comes as the market looks back on issuance and trading during the first half of 2010 at a time when new transactions are scarce and investors are keeping a wary eye on the developing Atlantic hurricane season.

The report provides a good overview of market activity during the first half of 2010 including insight on new issuance, trading in the secondary market, the state of the Swiss Re Global Cat Bond Index, a focus on the Blue Fin Ltd. Series 3 transaction and excellent supplementary market data. Below we highlight some of the key points and add our commentary.

Swiss Re are bullish about the prospects for the market over 2010 and expect 2010 issuance to eclipse the amount issued in 2009. They anticipate a number of non-U.S. peril transactions during the second half of the year which will be good for market confidence and investor appetite as it will provide much needed diversification opportunities. We expect any such deals to be eagerly snapped up by investment funds and it’s likely that any non-U.S. wind transactions will upsize to meet demand.

The first half of 2010 has lead to the market being U.S. wind heavy and spreads have widened due to the lack of desired capacity in the market. Spreads for non-U.S. transactions in the secondary market have tightened unsurprisingly as investors sought diversification in their portfolios.This has lead to a dislocation in the secondary market (due to the glut of U.S. wind and the impending hurricane season and its severe forecasts). Swiss Re see this dislocation as temporary and say that as we have now entered the Atlantic hurricane season investors are starting to return to the market and that as outstanding cat bonds mature and new non-U.S. wind bonds are issued investors will feel less constrained.

Swiss Re say they have already begun to see a stabilization in the secondary market with trades being seen at spreads more than 5% tighter than of late. They say it seems that spreads might have hit a ceiling and could be now on their way back down. We believe this bodes well for investors looking to move capital into and around the secondary market although the developing hurricane season will have to watched closely to see how the first major storm affects this market.

The charts provided in the report break down the capacity available in the market into types of risks and triggers used. Currently the market is around 70% U.S. based risks so there’s plenty of room for the balance to swing more towards diversification. Trigger mechanisms are dominated by indemnity, industry indices and parametric indices.

Overall the report portrays an air of confidence in the market and its prospects for the rest of 2010. We have a copy of the report which Swiss Re have kindly allowed us to make available for you to download here, we highly recommend you do so.

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