Cat Bonds Set 1Q Record

NU Online News Service, April 12, 2:58 p.m. EDT

The value of insurance-linked securities placements increased by more than half in the first quarter of this year as four insurers placed more than $1 billion in bonds in the market, according to a report from Willis Group.

In its “ILS Market Update, Q1 2011: The Market Digests a Major Catastrophe Event” report, Willis Capital Markets & Advisory says there was a record $1.015 billion of ILS placed in the market compared to $650 million for the same period last year—in a quarter traditionally seen as “relatively quiet” for such placements.

Four carriers made up the sponsoring of the issuance:

• Munich Re with a three-year tranche of $100 million.
• Chubb with both a three-year and four-year tranche, totaling $475 million.
• The Hartford with a four-year term tranche of $135 million.
• Swiss Re with two three-year term tranches totaling $305 million.

All four tranches are U.S. hurricane risk exposures, Willis notes, after a 2010 fourth quarter “that saw a good mix of perils for investors.”

Willis says the Tohoku earthquake in Japan has had an impact on the ILS market as 10 catastrophe-bond deals from six different sponsors are “potentially exposed” to the earthquake.

A $300 million tranche sponsored by Munich Re will be a total loss to investors, Willis says.

“At the time of writing, we do not expect that any other catastrophe bond will suffer a loss of principal directly as a result of this event,” the report says.    

“It is not yet clear what impact the Japan earthquake event will have on pricing for new cat bond issues,” the report observes.

The start of the quarter saw downward pressure on premium levels as cash flowed into specialist cat funds, creating strong investor demands for the bonds.

Should the cat-bond market demonstrate its ability to provide “a pool of capital” over a multiyear period in the face of significant loss, the event in Japan could help the market grow beyond the $12 billion in size it has remained at over the past three years.

What direction the cat-bond market will take in the second quarter remains a big question, Willis suggests, as the full impact of Japan's earthquake will need to play out. There are also questions about what impact the new RMS model will have on U.S. wind pricing. Willis says the model “has created some surprises.”

“As a result, the full impact in both the primary market and secondary market remains unclear,” Willis concludes.