September 2014 Bermuda:Re/insurance+ILS 55
Cat bond pricing:
to now? F where Bermuda:ILS
As Paul Schultz, CEO of Aon Benfield Securities, explained: “Conditions in the first half of 2014 led to a number of transactions coming to market where clearing spreads for buyers of capacity proved very attractive.” Conditions resulted in significant downward pressure on pricing in 2014, Schultz said. Cat bond issuance and pricing has steadied during the quieter middle part of the year, but it is evident that further downward movement is possible later in the year.
Pete Cangany, senior partner at EY, Bermuda, agreed. “While it is hard to imagine a continued downward trend, I suspect we are going to see further rate compression in 2014,” he said, and singled out a lack of catastrophe activity being the lead driver, but added that a point will appear when rates will stop declining.
Edward Hochberg, executive vice president and global head of analytics, banking, and advisory at JLT Towers Re, said that cat bond pricing reflects macroeconomic spread compression, which is “spilling over into our market”. This coupled with an oversupply of capital entering the space has led to an imbalance of supply and demand, compressing investor returns in the space.
“However, on the lower yield US wind bonds (below a 4.5 percent coupon rate), we have recently hit a point where the market is somewhat saturated, at least temporarily. This has had a corresponding effect on those bonds, where the bid/offer point is harder to cross. It will be interesting to see if the market revisits and tests those lows later in the year,” said Hochberg.
Cat bond pricing faces continued downward pressure in the face of buoyant investor demand. Here, we explore the pricing dynamics with key players in the ILS market.
or cedants, cat bond pricing has rarely been more attractive, with a raft of new and repeat issuers all coming to market in recent months. For investors however, margins are growing increasingly thin, even as interest remains strong among
pension funds increasingly comfortable with the convergence space.
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