Reinsurer confident that the market will keep growing

The number of insurance linked securities (ILS) issued doubled during the first half of this year to $3.6bn (2011: $1.8bn) as new investors joined the market, according to Swiss Re.

The reinsurer’s ILS market update for the first six months of 2012 revealed that the first half of this year fell only $237m short of the record first half of 2007, with 16 transactions and 28 tranches during the period. Of those US hurricane risk accounted for 23 tranches.

The first half of 2012 included a record $1.5bn issuance in the first quarter and a $2.1bn issuance in the second quarter – the second highest on record for that period.

The report also found that since the end of the 2011 hurricane season more new sponsors and investors had been introduced to the market, while repeat sponsors continued to realise the benefits in catastrophe bonds and investors in diversifying their portfolios.

New entrants

Among the new sponsors were Florida Citizens, which issued the largest single tranche in the history of the ILS market of $750m, as well as Louisiana Citizens, COUNTRY Mutual, and the North Carolina Farm Bureau, who used a shared transaction Combine Re.

“New and repeat sponsors have been attracted by the diversifying capacity source, as well as by price levels that are increasingly competitive with traditional reinsurance,” said the report.

“Capital continues to flow into the sector, with ILS fund mandates from large US and international pension funds becoming a recurring theme. Primary insurance companies have increasingly used indemnity triggers in their catastrophe bonds and have seen that investors are comfortable evaluating these deals on their merits.

“All of these factors, combined with a hardening market for traditional reinsurance, have led many companies to the ILS market.”

Non-peak issuance

The market also reported a significant non-peak peril issuance in Japanese earthquake and typhoon, California earthquake, and extreme morbidity.

Overall notional outstanding issuance in the ILS market had decreased each year between 2007 and 2011, as large maturities from bonds issued during the peak years of 2006 and 2007 outpaced new issuance, said the report.

Since the financial crisis, much of the new issuance has come from renewals of bonds that had matured, limiting the market’s growth.

This year is expected to be the first since 2007 with overall growth in notional outstanding.

At the end of the first half of 2012 the total outstanding amount of cat bonds was $14.7bn, compared with $13.7bn at 2011’s year end.

More than $2.4bn worth of cat bonds matured in the first half of 2012.

No bonds are due to mature in the third quarter, while nine bonds totalling approximately $1.1bn are due to mature in the fourth quarter.

Continued growth

“We remain optimistic regarding new issuance for 2012,” The report said. “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 added: “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.”