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CAT BOND ISSUANCE AND TOTAL OUTSTANDING VOLUMES ON RISK


16 14 12 10 8 6 4 2 0


Issued Outstanding Source: Willis Capital Markets & Advisory As a consequence of the events described above, we are left today with


an investor market in which ILS funds are dominant. The ILS funds are specialist investment managers focused on the ILS sector. Largely long- established, the ILS funds have built up reputation and expertise over many years. While these funds also suffered withdrawals in 2008 and 2009, most have rebounded and since exceeded pre-2008 capital levels.


ESTIMATED DISTRIBUTION OF CAT BOND INVESTORS BY CATEGORY


10% 5% Dedicated funds 15% 50% 20%


Money manager/pension funds Re/insurer


Multi-strategy hedge funds Bank


8% 8% Source: Willis Capital Markets & Advisory 9%


Needless to say, the turmoil in the market and sharp reduction in capacity caused a spike in prices; however, since mid-2009 through to June 2010, spreads have consistently tightened as additional investor capacity has emerged. The following chart illustrates the spread (effectively the rate on line) of a range of issues since early 2009, grouped by half year, from which the tightening of spreads is clearly discernible.


40 | INTELLIGENT INSURER | November 2010 19% 48% First half 2009


US PERILS CAT BONDS: ISSUE SPREADS AND EXPECTED LOSS 15.0%


13.0% 11.0% 9.0% 7.0% 5.0% 3.0%


0.0%


1.0%


2.0%


3.0% Expected loss Second half 2009 Source: Willis Capital Markets & Advisory Of particular interest is the nature of the sponsors that are now utilising


the ILS market. In the current environment where traditional reinsurance capacity is in plentiful supply for most perils, accessing the cat bond market may be a strategic decision based on a desire to spread sources of risk transfer capacity. Therefore, it is not surprising to find that the ILS markets are most widely used in relation to the perils that are most difficult and expensive to reinsure in the traditional markets, notably retrocessional and US property catastrophe reinsurance.


Cat bonds are now most widely used by US primary insurance companies, mainly as a source of hurricane cover (see chart below). Over three-quarters of the most significant US insurers now access the cat bond market to some extent. US hurricane reinsurance premiums can vary widely through the reinsurance cycle, especially following a large industry event. Using cat bond capacity for hurricane cover plays to some of the unique strengths of cat bonds: collateralisation and multi-year capacity.


CAT BOND SPONSOR TYPES (ON RISK) 2%


6% 5%


US Primary European Re Bermudian Re European Primary Government/State Japanese Primary Corporate


Source: Willis Capital Markets & Advisory First half 2010


4.0%


5.0%


1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 YTD


US$ billions


Risk spread


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