2012 a unique year for the insurance-linked securities market: Swiss Re

by Artemis on January 29, 2013

The insurance-linked securities and catastrophe bond market experienced a banner year in 2012, according to the latest market update report published today by reinsurer Swiss Re. As well as being a banner year, with the second highest issuance on record of $6.3 billion, 2012 was unique according to the reinsurer as the market was tested by catastrophe events like hurricane Sandy but investors demand for cat bonds and sponsors demand for coverage could not be shaken.

Assisting the ILS and cat bond market to its second largest year of issuance on record was demand from investors who continued to flock to the asset class, seeking the largely uncorrelated and risk adjusted returns that an investment in ILS and cat bonds offers them. As well as capital inflows from investors sponsors continued to drive the market forwards by taking advantage of the chance to cede risk at lower overall costs by employing ILS structures. The combined forces of investor demand and sponsors motivated to issue helped 2012 to this banner year.

But the year was unique and the ILS market faced challenges as well as record interest but overall the market reacted in an orderly and mature manner. Catastrophe events such as Sandy tested the ILS and cat bond market but even an event of Sandy’s magnitude could not shake investors demand for new bonds, as demonstrated by issuances that came to market after the storm, according to Swiss Re.

Swiss Re said that ILS and cat bonds have now moved beyond being a niche risk transfer product for insurers and have now become a fundamental part of re/insurers risk management programs. Alongside sponsors increasing comfort with issuing risk in cat bond and ILS form, investors too are becoming increasingly comfortable with the product and Swiss Re has seen increasing numbers of pension funds and asset managers participate in the market.

2012 saw the market start to discuss issues such as how to balance the needs of sponsors and investors with regards to deal structure, triggers and perils. Swiss Re said that these discussions have led to creative new offering structures and help to demonstrate what it calls the versatile and innovative nature of the ILS market.

2012′s ILS and cat bond issuance volume of $6.3 billion was made up of 27 transactions, split into a total of 47 tranches of notes and with an average size of $227m per deal. For comparison, 2011 saw 23 transactions at an average of $190m per deal, so 2012 was nearly 20% larger in notional size per transaction. Despite the large amount of issuance the high investor demand in the market enabled 80% of the issued transactions to tighten on pricing and/or to upsize before close.

Catastrophe bond and ILS yearly issuance and outstanding

Catastrophe bond and ILS yearly issuance and outstanding

Helping the market to grow in outright size in 2012 was support from a number of 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. A number of new sponsors entered the market as well and sponsors such as Country Mutual, Florida Citizens, Louisiana Citizens, and North Carolina Farm Bureau (NCFB) all helped the market achieve outright growth of around $2.5 billion on 2011.

After what it sees as a successful year of issuance size, capital inflows into the market and continuing use of innovative structures, Swiss Re Capital Markets looks forwards to 2013 hoping for strong issuance to continue these trends. With around $3.1 billion of cat bonds maturing in the first half of 2013, Swiss Re notes that there are plenty of opportunities for new issuances to come to market.

You can access the full report from Swiss Re via its website.

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