The insurance linked securities (ILS) market, an increasingly popular alternative investment option for corporate treasurers and others, enjoyed a “banner year” in 2012 with around US$6.5bn of bonds issued; the second-largest year of issuance and exceeded only in 2007, according to Swiss Re.
The reinsurance group reports that ILS investors continued to flock to the largely uncorrelated and attractive risk-adjusted returns offered by catastrophe (cat) bonds, while sponsors capitalised on the opportunity to cede risk at lower overall costs by employing ILS structures. The Swiss Re Global Cat Bond Total Return Index continued to climb, while maintaining volatility levels well below both Barclays US High Yield Index and the Standard & Poor’s (S&P) 500 Total Return Index.
Swiss Re added that catastrophic events again tested the market, but even hurricane Sandy in late October could not shake investors’ demand for new bonds, as proven by the successful placements after the storm occurred.
“The market has developed beyond a niche product for insurers, and has grown into a fundamental part of re/insurance companies’ risk management programmes,” the group commented. “Along with sponsors’ growing comfort level with regards to transferring risk through cat bonds, the investor base too has grown increasingly comfortable with the product, and we are seeing more pension funds and asset managers participate in the market.”
Last year saw 27 deals completed, producing a total of 47 tranches, with an average size of US$227m per deal, against 23 deals at an average of US$190m in 2011. In addition to the strength of issuance, the appetite for taking on cat bond risk was reflected in a broadening investor base. During 2012, the industry experienced a shift in capital inflow with increasing participation from money managers and pension funds; a transition that Swiss Re expects to continue in 2013 and beyond.
The year also demonstrated the market’s potential for growth, as issuance outpaced bond maturities taking into account both natural catastrophe (nat cat) and extreme mortality bonds. During 2012 the market increased significantly, resulting in new issuance of US$2.5bin more than the notional size of maturing bonds. The market was bolstered by new issuances from previous sponsors including Aetna, Allianz, Assurant, CEA,
Chubb, FONDEN, Hannover Re, Liberty Mutual, Munich Re, MSI, SCOR, Swiss Re, Travelers, USAA, Zenkyoren, and Zurich Insurance Group. Growth was further strengthened by new sponsors entering the market, such as Country Mutual, Florida Citizens, Louisiana Citizens, and North Carolina Farm Bureau (NCFB).
Swiss Re Capital Markets is also optimistic on the market’s prospects for 2013, with at least US$3.1bn in bonds maturing over H1; creating opportunities for new issuances to enter the market. The group says that balancing the needs of sponsors and investors will continue to be a focal point of the ILS market in 2013. Last year marked an increase in the amount of indemnity bonds from previous years, suggesting that investors are willing to help sponsors minimise their basis risk, so long as they are compensated for the additional uncertainty.
Continuing the trend from H1, 2012 saw the largest yearly issuance of indemnity bonds in the ILS market’s history, with total of over US$3.2bn against US$1.4bn in 2011. The report also finds that the ILS investor base has also changed, with an increase in the number of pension funds and asset managers participating in new issuances in 2012. Reinsurers have decreased their proportion of the overall investment in the sector, while dedicated hedge funds remain the largest buyer of the ILS market.
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