ILS market reawakens to strong demand

After a quiet start to the year, two new catastrophe bonds are being marketed that should take 2013 issuance to around $1 billion. Sources say investor appetite for these deals remains strong thanks to poor returns elsewhere in the financial markets while cedants remain appreciative of the diversity they offer.

Merna Re IV is a $250 million three-year deal that will provide State Farm & Casualty with US earthquake protection. Meanwhile, Guy Carpenter and Munich Re are reportedly working on Tar Heel Re, which would give the North Carolina wind pools – the North Carolina Joint Underwriters Association and the North Carolina Insurance Underwriters Association – three years of hurricane protection.

This is State Farm’s fourth catastrophe bond in the Merna Re series of deals. This latest Merna Re IV cat bond will replace some of the cover provided by Merna Reinsurance II which matures in April. Standard & Poor’s has rated the new bond B+.

The North Carolina underwriting associations already have some cat bond protection through the Johnston Re (Series 2011-1) deal but a 2010 Johnston Re deal matures in May of this year.

Experts in this market say they expect both deals to be well received on the back of strong investor demand for products that offer decent returns yet are uncorrelated to the rest of the financial markets.

“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!

“ILS products represent a reasonable return for limited risk: limited, that is, if investors or their managers are sensible in diversification and don’t make the mistake of accumulating risks on any one possible event. Of course, there is a danger of multiple events in a given year, but if sensible diversification is utilised, these risks can be significantly reduced.”

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.