Zurich cat bond demonstrates ILS appeal to investors

The recent catastrophe bond issuance by insurer Zurich demonstrated the growing appeal of these vehicles as a risk transfer mechanism for insurers and reinsurers and also to investors increasingly willing to participate in more complex risks.

The $270 million three-year bond, called Lakeside Re, was oversubscribed by investors. Andreas Mueller, head of origination, distribution and ILS investment at Munich Re’s risk trading unit, the joint lead structuring agent on the deal, said a much bigger deal could have been placed, such was the demand from investors.

“The warm reception from investors to this bond is a strong sign for the market overall,” he told Intelligent Insurer. Mueller said almost all the catastrophe bonds issued in 2011 and 2012 were oversubscribed, by an average of 60 percent.

This means there is more demand than supply in the market – a good thing for insurers and reinsurers. “This provides a very good environment for insurers and reinsurers to bring their risks to the capital markets,” he added.

Richard Pennay, director at Swiss Re Capital Markets, the sole bookrunner and joint lead structuring agent for the offering, agrees. He notes that investor demand for catastrophe bonds is premised on very good returns – especially compared with the wider investment markets in this economic environment.

The Swiss Re Global Catastrophe Bond Index showed a total return of 10.28 percent for investors last year. “It was a good year for sponsors being able to bring deals to market, but also a very good year for investors in terms of absolute return,” he said.

Pennay added that the recent Zurich deal was more complex than previous issues. It was the first time Zurich had ceded complex commercial business on an annual aggregate basis to the capital markets. “This is significant because it demonstrates investors’ receptiveness to complex commercial business,” he said.

The deal was also significant because Zurich ceded risks from both the US and Canada. Zurich had only ceded California earthquake risk previously.

“Here, we’ve turned it into an annual aggregate and we’ve expanded the regions to include the peak earthquake zones across the US and Canada,” he said.