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Cat bond sales go against cycle, says S&P

Ratings agency Standard & Poor's (S&P) says third quarter issuance from the insurance-linked security (ILS) market are on track to beat historical norms for the period, signalling a potential change to the sales cycle.

This comes after ILS sales experienced a busy first quarter and abnormally quiet second quarter of 2011. The usual sales pattern is the reverse as cat bond sponsors seek to lock in reinsurance cover ahead of the US summer hurricane season.

In the second quarter just $742mn of capacity was placed in natural catastrophe and life & health bonds. This compared to $2.3bn in the second quarter of 2010, according to Aon Benfield data.

But some $630mn of new issuance has already come to market in the third quarter, two-thirds more than the roughly $370mn sold in Q3 2010.

S&P said it was likely that bond sponsors had been unable to seek the full reinsurance supply they sought in the mid-year renewals or that they feared being caught in a rush to the ILS market before year-end.

The agency said the new hurricane model release from RMS was a key reason for slow issuance in the second quarter, due to uncertainty in the market.

All the third quarter bonds have been non-peak bonds - European wind offers or extreme mortality risk - which have been snapped up by ILS investors keen to balance their portfolios with diversifiers.

Capital markets activity has also picked up in the industry loss warranty and collateralised reinsurance market, the agency noted.

"The extra supply of capital seems to indicate that for the time being, at least, reinsurance pricing will remain more attractive than issuing securities in the capital markets."

However, cat bond sales should regain their attraction for sponsors as multi-year protection could attract buyers wanting to lock in pricing at the January renewals.

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