Insurance-Linked Securities: First Quarter 2011 Update
ILS Investors Contribute To Market Strength, Activity
Secondary trading began the year with several investors looking to deploy capital. Conversely, we observed investor interest in selling lower-coupon bonds as they sought to add more yield after a year in which most bonds were issued in the one to two percent expected loss band. This demand for higher yields also translated into strong demand for Successor X Ltd. Series 2011-2, which kicked-o the quarter’s new issuances with significant oversubscription and price tightening.
Catastrophe Bonds Outstanding Amount By Peril (As af 03/31/2011)
Rest of World
For bonds exposed to Japan risk, pricing has moved from approximately par to levels resulting in a weighted average mark-to-market loss of approximately 30 percent at press time.
We expect the aggregation of recent major catastrophic events (including the Australian floods, New Zealand earthquakes and the Japan earthquake and tsunami) to minimally aect U.S. pricing of ILS. We also expect traditional reinsurance in peak zones in the U.S. and Europe to be unaected by the reinsurance losses suered thus far. And, while Australia, New Zealand and Japan have yet to experience major renewals since the catastrophic events, pricing could increase in these areas. Note that traditional reinsurance in Japan typically renews in April and, as a result of events in the region, most insurers are extending coverage while the impact is determined. While the ILS market has been largely uncompetitive in pricing these risks, there could be opportunities to gain momentum going forward.
As noted above, investors will realize maturities of property/ casualty catastrophe bonds totaling almost $2.4billion in the second quarter. As the primary market pipeline appears to be less active in Q2 2011 than it was the year prior, we expect downward pressure on ILS pricing as investors seek to reinvest the inflows from maturing bonds.
Catastrophe Bond Maturities By Quarter
Source: Aon Benfield Securities
Trading volumes remained elevated as investors rebalanced their portfolios in anticipation of an active issuance environment. Foundation Re III Ltd. Series 2011-1 Class A was launched at $100 million; the deal ultimately closed at $135 million.
East Lane Re IV Ltd. gave secondary trading a boost as investors cleared room for a comparatively high-yield transaction. This spurred trading in both live catastrophe and dead catastrophe bonds (those with little to no risk remaining until maturity), pushing trading volumes at Aon Benfield Securities to levels not seen since 2008.
Trading Eects of Japan Events
Activity at the end of the first quarter was centered on the Tōhoku earthquake. Several ILS investors exited positions exposed to Japan Earthquake until the extent of the damage could be better understood. Although at the time of this publication it is still not clear as to the final loss to catastrophe bonds, it appears that only one bond will suer a loss of principal, although all of the Japan earthquake bonds have suered mark-to-market losses of some degree. The events in Japan also caused short term reduction in trading volumes of
S.-based risks as investors focused on Japan. Interest around
S. trading had begun to increase at press time.
Nat Cat Maturities
Source: Aon Benfield Securities