Following a near-record year in over $7-billion of issuance in catastrophe bonds, industry players at a recent roundtable hosted by Standard & Poor’s sounded confident that investors new to the sector are not going to get cold feet if they lose money. These participants were conveying their own views, which may not coincide with those of their respective firms.
One of the reasons is that allocations remain a tiny fraction of their total investments.
“The managers who are flowing capital into this space are investing 0.5% or 1% of their overall portfolio,” said Mike Demetre, chief risk officer for Allstate Protection.
In terms of covered events, the last few years have been relatively “benign,” according to S&P. As a result, bondholders who have bought a deal for the first time during this period may be surprised if a covered disaster occurs.
Still, “the expectation is there won’t be the re-up transaction shock as we saw in traditional markets in 2005 to 2007,” Demetre added. “The expectation is that money’s here and it’s probably going to be here to stay.”
Philipp Kusche, a director of insurance linked securities at Swiss Re Capital Markets Corp., said that while institutional investors were first drawn by the higher relative yields to the ILS sector, they are sticking around because the diversification these deals represent.
In addition, the more mainstream institutional investors have been willing to take on risk in the cat bonds sector that is less remote. This bodes well for their staying power, according to Allstate Corp. Treasurer Mario Rizzo. “If they’re more willing to play in the belly of the risk curve as opposed to the tail, there’s an expectation that there will be losses,” he said.
With the growth of the cat bond sector, securitization is no longer the “afterthought” it used to be when insurers are in search of reinsurance capacity, said Rhodri Lane, manager of insurance-linked securities at AIR Worldwide.
Looking at issuance, Lane added that indications of growing demand from both sponsors and investors, as well as the roughly $6.5 billion worth of bonds maturing in 2014, point to another busy year. “I wouldn’t be to see a higher issuance amount closer to $8 billion in 2014 just given those metrics,” he said.