Index-only cat bond mandate is outpacing demand and squeezing multiples
A "material" amount of capital with a mandate to invest in industry loss index trigger deals has flowed into the cat bond market during the past quarter, according to sources.
The total size of the inflow is estimated to be around $500mn. The capital is thought to be lodged with ILS managers in Europe, although sources differed on whether it was with one or two firms.
While cat bond mandates are relatively common among ILS investors looking for liquid strategies, it is unusual for bond mandates to be targeted to deploy into a specific deal structure.
Sources noted “very aggressive” buying behaviour targeting index deals in the cat bond market as evidence of the mandate, with new index deals seeing rounds of upsizing and re-pricing downward.
Other participants commented on index bonds being "very popular" and said there was a "phenomenal" amount of index-deal-specific capacity.
Others noted that because of the relatively low volume of index issuance coming to market this year compared to earlier years, and with several index bonds coming off risk and not being replaced, this had also boosted capacity for the index deals.
The popularity of index deals reflects investors looking for structures that are easier to analyse, as well as the fact that ILW cat bonds have historically had more limited losses than indemnity deals.
"People like simplicity. You know where the loss will sit, and you know about the loss quicker," said a source.
However, sources noted also that index deals come with a degree of risk related to exposure data, which generally reflects property values from a year or two years ago, before inflation began to take hold.
Among the index deals attracting attention, sources point to Florida Citizens securing 150% more limit than initially targeted for its new Lightning Re bond. The state carrier placed $500mn of Florida named storm personal lines risk at a 5.3x multiple, with final pricing 8% below the initial guidance.
Sources also noted Convex Re's retro bond Hypatia Re, which repriced downward twice, securing $150mn of coverage at 9.5%, with the multiple at 3.5x; and Ariel Re’s Titania Re, whose final price came off 6.5% from initial guidance.
Sources added that an index deal-only mandate would likely attract a low fee percentage for the manager involved.