3 April 2013 Alternative Risk Transfer

Expect a bumper year for cat bonds

A combination of strong new issuance and the fact that few bonds mature this year mean the reinsurance industry should expect 2013 to be a bumper year for cat bond issuance.

That is the view of several cat bond specialists who say strong issuance buoyed by bullish demand is already boosting the market in a year when very few bonds will mature.

“In another week, the cat bond market will be close to $18 billion and the bulk of the issuance pipeline has not been processed yet,” said John Seo, co-founder and managing principal at Fermat Capital Management, which manages $4 billion in catastrophe bond investments.

And Seo points out that only $3 billion of bonds are due to mature between now and year-end. “Bonds maturing this year were, on average, issued in 2010. Since 2010 was decidedly not a big issuance year, we get few bonds rolling off this year,” he said. “The net result is not only a bumper issuance of cat bonds, but also a turbo-boost to the net outstanding size of the market. We are on track for $21 billion in bonds outstanding by year-end.”

This dynamic is also being boosted by growing demand from the investor side for cat bonds. Poor returns in more traditional investments are increasingly encouraging investors to seek the diversification and higher yields cat bonds can offer.

“Until something dramatic happens in the non-insurance markets, these deals will retain their attraction to investors,” said Clive O'Connell, partner at law firm Goldberg Segalla. “At present, there is precious little scope for investment, unless you wish to invest in the arms industry!”

This healthy appetite for these deals has come to the fore in other ways. It has also been reported that New York investment firm  Stone Ridge Asset Management has successfully raised its initial target capital for its two insurance-linked securities (ILS) and reinsurance-linked investment funds. The manager  launched two reinsurance-linked funds in the last quarter of 2012, as reported on this news service, and completed its first round of fundraising by the end of January.

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