Pension money continues to flow into ILS space, but diversification is key

The insurance-linked securities market saw steady issuance during 2011 and still managed to achieve near $5 billion of new issuance despite the disruptions to the market caused by new risk models and large catastrophe events, says Towers Watson in their January report on the P&C re/insurance market (available here). Sponsors of ILS and catastrophe bond deals continue to see these instruments as an integral part of their overall capacity, according to the report, which is encouraging for the year ahead.

The P&C Insight Report from Towers Watson goes into some detail on the renewals and pricing of P&C re/insurance and where they see those trends headed, so it’s well worth a read. The piece that interests us the most is that they are yet another of the brokers who have a really positive outlook on the ILS and cat bond sector.

One of the most positive statements, and one which we can echo from our discussions with the ILS investment community, is that the sector continues to attract new capital. This is a trend we hear about on a daily basis in our discussions with investment managers, fund managers, pension scheme trustees and banks. Everyone echoes the same sentiment, that the low-correlated nature of ILS is currently a really attractive investment given the health of the broader financial markets. There is a lot of capital being taken out of certain asset classes and it needs somewhere to be put to work. ILS and cat bonds are currently a great place for this capital. Towers Watson specifically says that pension money continues to flow into the sector and this is certainly the largest source of available capital which could be put to work in ILS and cat bonds, if enough opportunity existed.

This is where diversification is going to be key going forwards for the ILS and cat bond markets. Without more diversified opportunities for investment, so in reality anything other than U.S. hurricane right now, the capital on the sidelines just isn’t going to enter the market as it can’t be put to work efficiently. The market does need to grow, but growth in the right areas by becoming more balanced and less U.S. wind top heavy is what will help the flow of incoming capital be put to work.

Towers Watson are positive on the outlook for the market and see conditions remaining positive for new issuance as issuers continue to look to complement their overall reinsurance cover. Diversification though is what investors seek (particularly the large institutional investors and pension scheme trustees with significant capital available to put to work) and the market needs to provide that  if we are to see the true potential size of the ILS and cat bond market in 2012.