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Willis ILS Report: Investors Eager for Cat Bonds Following Light 2Q Issuance

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Posted on 14 Jul 2011

Unprecedented natural catastrophe losses in the first quarter of 2011 coupled with changes to U.S. hurricane models contributed to only four new catastrophe (cat) bond issues, totalling $592 million, in the second quarter of 2011. This is down from the same period in 2010 when eight new deals, totalling $2.1 billion, were brought to market. The latest Insurance-Linked Securities (ILS) Market Update from Willis Capital Markets & Advisory (WCMA), part of Willis Group Holdings, found that despite the loss activity and low issuance in the second quarter of this year, investors are still keen to invest in cat bonds.

The quarterly report titled, “The Market Digests a New Hurricane Model Amid Light Issuance Volume”, found that while the capital markets digested the tragic Japanese earthquake with “relatively little disruption”, the latest RMS model for U.S. hurricane risk appears to have caused uncertainty among market participants which impacted the capacity and pricing of second quarter deals.

WCMA reported that during the second quarter, $2.1 billion of cat bonds matured (year-to-date maturities for 2011 are now $3.3 billion), in addition to a $300 million transaction that was a total loss for investors as a result of the Tohoku earthquake in March. Outstanding catastrophe bond capacity has therefore reduced by a net $2 billion in 2011 to date, said WCMA, as maturing bond limits have outstripped new issuance.

Bill Dubinsky, Head of ILS at WCMA, maintained a positive outlook for the sector saying, “Investors have cash to invest and remain keen on risk in cat bond form, but are somewhat starved of new issuance, particularly non-U.S. wind exposed deals. The cat bond market should see an uptick in deals in the second half of 2011 as investors get more certainty around how the new RMS hurricane model will affect pricing. It will also benefit from the increase in ex-U.S. catastrophe reinsurance pricing.”

However, with 71 percent of outstanding cat bond limit exposed to U.S. hurricane risk of some form, Dubinsky warned that the market’s performance in the remainder of 2011 rests on what happens during the current U.S. wind season.

The latest WCMA report also examines the state of the secondary market and features an interview with Willis Re Inc. President James Kent on how catastrophe reinsurance brokers view the cat bond market


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