Following several strong years, growth in the insurance-linked securities (ILS) market stalled in 2015, reports Munich Re.
The German reinsurance giant said that ILS issuance in 2015 totalled US$6.9bn across the market segments of non-life, life and health, down 22% from 2014’s total of US $8.4bn. Net capital inflow – the difference between issuances and maturities – peaked at US$3.9bn.
Munich Re said that the reduction was driven both by a reduced share of new sponsors entering the market and an increased share of non-renewed bond maturities; only 12 out of 21 sponsors with expiring bonds launching new issuances.
Overall maturities amounted to US$6.46bn and the market saw a net inflow of only US$428m, with total market size in terms of outstanding capacity edging up from US$23.9bn to US$24.3bn. The drop in issuance also reflected a shift of focus among insurers towards other collateralised reinsurance formats.
However, 2015 finished strongly, with six issuances and a total volume of US$1.5bn placed in the fourth quarter. “Q4 issuance was diverse, both in terms of perils as well as sponsors,” the group commented.
Pricing remained at 2014 levels and did not tighten further, as investors did not reduce their minimum return requirements. “Pricing discipline among investors is visible in risk spreads at issuance and secondary market trades,” said Munich Re. “The latter show that current pricing hovers around 60% of 2011 levels, with the usual spike towards mid-year as a result of the tropical storm season in the US.”
The reinsurer describes 2016 as “a pivotal year” for the ILS market. Over the first half Munich Re forecasts more than US$3.9bn of maturities, creating substantial liquidity and a strong need to reinvest among investors. The question is: to what extent will sponsors pick up on this liquidity and renew expiring transactions?
“Overall, total maturities in 2016 amount to US$5.32bn, and we expect issuance activity to exceed us$6bn, which would translate into a slightly higher net capital inflow than during 2015, but would still imply a further downturn in issuance volume,” the group adds.
However, the abundance of liquidity, coupled with a persistent low interest environment, is likely to continue driving demand for ILS among investors and pricing for each peril should generally remain at current levels.
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