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A number of outstanding catastrophe bonds have had their secondary market values marked down, as losses could be expected due to the impact of recent hurricanes Harvey and Irma. But the brokers do not currently seem to have a clear view of cat bond losses and prices in some cases diverge dramatically.

Considered particularly at risk are a number of per-occurrence catastrophe bonds sponsored by Florida primary insurance specialist firms, as these companies could be the ones that draw on reinsurance arrangements the most of all.

Also considered at risk are annual aggregate cat bonds that provide retrocessional coverage to reinsurance firms, with the notable markdowns being to cat bonds sponsored by XL Catlin, Everest Re and Allianz Risk Transfer, as well as some aggregate cat bond markdowns for primary giant USAA.

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Issuance volume in the second quarter of 2017 was the highest for any quarter since 2009. $7.0 billion of new risk capital was issued via 28 deals, surpassing the previous Q2 high of $4.6 billion issued in 2014.

Total issuance of $9.8 billion for the first half of 2017 exceeded the highest total annual volume since 2009. The total nominal amount of outstanding ILS increased to $29.5 billion (an increase of 17.6% year-over-year). In the second quarter of the year, 28 bonds were issued totaling $7.0 billion. This outpaced 23 maturing deals with a notional value of $4.6 billion during the same period.

Bermuda remains the leading jurisdiction for the issuance of catastrophe bonds. ILS issued from Bermuda represents 76.1% ($22.5 billion of $29.5 billion) of total outstanding capacity at the end of Q2-2017. Since 2010, 185 Bermuda-based Special Purpose Insurers (SPIs) have been registered and have issued 187 ILS deals.

Bermuda is also host to foreign ILS listings on the Bermuda Stock Exchange (BSX) which augments the depth of the secondary market.* A total of 94 foreign ILS (comprising 158 tranches) are listed on the BSX with an aggregate nominal value of $23.3 (5.9%) billion. Approximately $1.4 billion of these deals were issued by vehicles domiciled in Ireland and the United States. Twenty-four new ILS deals totaling $6.0 billion were listed on the BSX during the quarter while 15 deals in the amount of $3.6 billion matured.

* Notes programmes are excluded from the number of BSX listings. Moreover, the aggregate nominal value of listed ILS does not include ordinary shares issued by (re)insurance funds or participatory notes issued by sidecars.

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In a recent report, global ratings agency A.M. Best has warned of the potential impact to Florida exposed catastrophe bonds from the devastation caused by hurricane Irma, but the real exposure for the market is quite low and aggregated losses could be more of a threat.

The overall economic and insured loss from hurricane Irma remains unclear, and will certainly take some time to be fully understood owing to the complexity of the event. Estimates currently suggest an insurance and reinsurance market impact in a range from $20 billion to $40 billion.

The catastrophe bond market has a strong focus on Florida risk, so naturally there’s been discussion and speculation surrounding the potential impact to outstanding Florida exposed bonds.

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Hurricane Irma, which hit Florida over the past weekend and is expected to result in $16-26 billion of reinsured losses, will trigger rate increases of 4-5 percent for US nat cat reinsurance cover, according to Sept. 14 research by asset manager AllianceBernstein.

The main trigger for rate hikes is the likely reduction in alternative and conventional reinsurance capital, according to the analysts. The earnings impact of Irma and Harvey seems well within the modelled range and in itself would not justify a material rate increase as this is what primary insurers and their customers have paid for. But about 8-10 percent ILS capital will be eroded and further ILS capital will be trapped until loss estimates are robust, suggesting ILS capital supply will be lower at least for Jan 1 renewals. In addition, Lloyd’s is seen potentially over-exposed in Florida, which could lead to lower supply form this side as well.

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Anticipating rate movement post-Irma, Dirk Lohmann, chief executive of Zurich-based ILS fund manager Secquaero reveals the company is working with Schroders (its main backer) to come up “with additional offerings that are more focused on just the U.S. risk.”

Speaking to Artemis at the Rendez-Vous de Septembre in Monte Carlo, Lohman said that while Irma would not be as significant a loss as had been anticipated given its west coast landfall, it would nevertheless prove a test for the ILS market.

“There was probably a sigh of relief amongst many market participants, because while it can still be a very significant loss it’s not the same magnitude as Miami might have been. We saw the marks on the bonds on Friday evening from the broker dealers and they were all over the map.”

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It has been a remarkable year in the alternative capital market and all sectors are continuing to grow, Cory Anger, global head of ILS origination and structuring, GC Securities, told Monte Carlo Today.

“With the exception of the sidecar market, the core money that supports public or private cat bonds and collateralised reinsurance is dominated by a similar group of investors,” Anger said.

“It’s a case of form over substance for them in how they get to assume the target insurance or reinsurance risk, but they’re putting their capital in a format that may be easier or more cost-effective for a cedant to elect to access the alternative market.”

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Losses from Hurricane Irma will not affect investor interest in the insurance-linked securities (ILS) market, according to Tom Johansmeyer, assistant vice president at ISO Verisks’ PCS strategy and development.

He told Monte Carlo Today that he felt investors will not be spooked by payouts from Irma.

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Bermuda is well placed to react to the needs of the market in the wake of hurricanes Harvey and Irma, according to KPMG.

“The first thing that the Bermuda Market will do is pay,” Mike Morrison, managing director of KPMG in Bermuda told Monte Carlo Today.

“That’s key. The catastrophe reinsurance market whether traditional or alternative is well regarded for paying quickly and that is really important, because demonstrating that reinsurance does respond and gets the money to the people who need it as quickly as possible, albeit through a distribution chain, is really important.

“The second piece of this is the opportunity, which has been demonstrated particularly with Harvey, to highlight the protection gap.”

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