April 1, 2015

Cat bond pricing stabilises for now

Data from recent deals indicates that catastrophe bond prices have stabilised over the last 12 months. Has the market finally reached the bottom or is it just pausing for breath?

Cat bond spreads fell by close to 50% over two years from 2012 to 2014. This was considerably faster than other parts of the reinsurance market. One reason for this rapid fall was the demand for tradable products from funds with high liquidity requirements.

But in the last 6 months, investors have been successful in resisting further reductions in rates – despite the continued reductions in other parts of the reinsurance market. This week, Allstate was reported to be reconsidering their latest catastrophe bond when it failed to gather sufficient investor interest in the marketed price range.

Cory Anger, Global Head of ILS Structuring at GC Securities explained to InsuranceLinked what has been happening: “After two years of dramatic decreases in spreads, the recent batch of cat bonds have failed to push the market any further. It seems that investors have decided to stabilise pricing – for now.”

“Pricing in the first half of 2015 is generally consistent with the levels experienced in the second half of 2014. This is despite the fact that the first six months of this year are seeing the highest percentage of 144A cat bond maturities since 2001.”

A few factors could be contributing to the relative stability over the last year:

  • The recent rise of risk premium in other parts of the financial market (eg junk bond spreads) may have helped to support cat bond prices.
  • The increasing use of ‘private’ cat bonds to satisfy the appetite of liquid mandates.
  • A number of cat bond funds generated low single digits in 2014 despite the lack of events. This may be causing the fund managers to take a tougher line.

Read the full report and view the statistical models at Insurance Linked by clicking here


Source: Insurance Linked


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