Reinsurer Swiss Re has said windstorm risks are driving an increase in the issuance for ILS products this year.

The underwriter has published its report on the ILS year so far and found that the first six months of the year had continued the trend of strong returns for the ILS sector after the financial crisis.

“The Swiss Re Global Cat Bond Index returned 3.3% in the first half of 2010, with recent price declines at the start of wind season offsetting a very strong first quarter,” it said.

New issue volume for the year so far is $2.5 billion, 40% higher than the same period in 2009, and 73% of all 2009 issuance.

“As we anticipate a robust pipeline of transactions for non-US perils in the rest of the year, it seems likely that 2010 new issue totals will meet or exceed 2009 levels,” Swiss Re added.

Nearly 85% of the new issuance in this period was exposed to US Wind risk.

The heavy concentration on wind however, contributed to capacity constraints for investors and led spreads for this peak peril to widen in May and June. Meanwhile, spreads for bonds with non-US risk began trading at tighter levels in the secondary market as investors looked to balance their portfolios. This dislocation occurred as a result of a couple of dynamics.

“Firstly, many dedicated investors reached their aggregate limits for US Wind risk and were unable to purchase more US Wind bonds despite having the cash to do so,” explained the report. “Secondly, the forecasts for the 2010 hurricane season have suggested a very strong storm season ahead for 2010. This caused investors to be more cautious with purchasing new positions.” 

The report added: “It is our view that this dislocation is temporary. As we enter into the wind season and there is more visibility around the level of hurricane activity, investors are returning to the market.

“Additionally, as outstanding bonds mature and bonds with non-US Wind risk arrive in the market, we expect constraints to ease for those investors who have reached their maximum aggregate US Wind limit.”

Swiss Re’s research reported there are currently $13.5 billion bonds outstanding in the cat bond market. The overall outstanding amount may decrease from the previous two years due to the lag in new issue in 2008, however, the market only needs to see another $1 billion in new issues to surpass last year’s level.

“Stronger new issuance would signal a rebound in the growth of the market after the financial crisis,” it said.