Investors Returning to Insurance-linked Securities

The market for insurance-linked securities (ILS), a crucial area for treasurers seeking to insure against physical supply chain risks, continued a strong recovery in the first half of 2012. According to reinsurer Swiss Re there were US$3.6bn of new issues, marking the most active H1 since 2007.

The market for ILS, the term for financial instruments such as catastrophe (cat) bonds whose values are driven by insurance loss events, flourished in the aftermath of hurricanes Katrina, Wilma and Rita in 2005 but activity subsequently dipped. However, Swiss Re reports that a recent revival has continued since the end of the 2011 hurricane season last November, with new and returning sponsors attracted by a diversifying capacity source and also price levels that are increasingly competitive with traditional reinsurance.

The reinsurer said that capital continued to flow into the sector during H112, with ILS fund mandates from large US and international pension funds a recurring theme. Primary insurance companies are increasingly using indemnity triggers in their cat bonds and find that investors are comfortable evaluating deals on their merits. These factors, combined with a hardening market for traditional reinsurance, are leading many companies to the ILS market.

The first half of 2012 saw established cat bond sponsors accessing the capital markets, such as Aetna, Allianz, Assurant, the California Earthquake Authority (CEA), Chubb, Liberty Mutual, Mitsui Sumitomo Insurance (MSI), Munich Re, Swiss Re, Travelers, United Services Automobile Association (USAA) and Zenkyoren.

New sponsors included Florida Citizens, which issued the largest single tranche in the history of the ILS market of US$750m, and Louisiana Citizens, Country Mutual and the North Carolina Farm Bureau (NCFB). Country Mutual and NCFB came to market with an innovative transaction called Combine Re, providing the two companies with separate limits in a shared transaction collateralised by the capital markets.

With around $3.6bn across 16 transactions and 28 tranches, H112 was only US$237m short of the record established in 2007 and double the US$1.8bn recorded in H111. Among the cat bonds issued, US hurricane risk was by far the most common peril and was covered in 23 out of 28 tranches. However the market also saw significant non-peak peril issuance, including Japanese earthquake, Japanese typhoon, California earthquake and extreme morbidity.

Swiss Re said that historically, ILS sponsors had waited until the second quarter, the period directly preceding the North Atlantic hurricane season, to access the capital markets. However, sponsors had recently seen improved execution in the first quarter and increasingly sought to bring deals to market earlier in the year. H112 saw US$1.5bn issuance in Q112 and US$2.1bn in Q212, marking the second highest Q212 on record.

The reinsurer added that it was upbeat on new issuance for H212. “It remains clear that sponsors view the ILS market as an important part of their risk management programmes, and as a source of multi-year collateralised reinsurance protection,” it said. “The broad investor base sees value in a diversifying and non-correlated asset class. Due to these factors, the ILS market is likely to continue to grow in the future.”


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