May 2011/1

Modelling agency RMS says Standard & Poor's (S&P) decision to review RMS-modelled US wind cat bonds will create opportunities for arbitrage as similar risks are given different ratings.

On the eve of another hurricane season, US cat reinsurers are now widely expected to enjoy typical rate increases of around 10 percent on their mid-year renewal programmes.

The cat bond market shrank in the first quarter of 2011 despite record sales for the traditionally quiet period, according to brokers.

Cat bond values have stabilised after a month of decline following the Japanese earthquake, but the market has not yet begun to make inroads on recovering the value it lost.

Chubb's monster $475mn East Lane Re IV bond issue boosted secondary cat bond trading volumes in the first quarter as investors looked to clear their portfolios to participate in the deal.

Cat bond investors have taken on more risk in 2011 than the market's long-term average, broker GC Securities said in its first-quarter ILS report.

Veteran ILS sponsor Allianz praised the "consistency" of the market as it closed a $40mn cat bond under its Blue Fin series last month.

Investors remain cautious on Japanese risk as the deadlines edge closer for determining which bonds were triggered by the 11 March earthquake.

In recent years, as we approached the US wind season, the ILS market would be in the throes of a feeding frenzy, with investors gorging on offering circulars until they had to roll away and digest the contents of their stomach.

Leading convergence investment manager Nephila Capital has sold $1.67bn of a new hybrid indemnity and parametric contract, Trading Risk can reveal.

Cat bond structurers say the market is still on track to grow in 2011 despite a sluggish start to the wind season build-up.