Munich Re notes ILS investor discipline in 2016, as market grew again

by Artemis on January 16, 2017

Insurance-linked securities (ILS) and catastrophe bond investors displayed pricing discipline in 2016, according to global reinsurance firm Munich Re, as risk spreads across the year remained stable, while the outstanding market reached a new high.

In its latest quarterly report on the catastrophe bond and ILS market, Munich Re’s specialists noted that momentum in the second-half of the year helped to drive the outstanding market to a new record, while overall pricing in 2016 remained at 2014/2015 levels.

“The ILS market finished with a strong year-end momentum of more than $2bn dollars being placed during the last quarter,” Dr. Andreas Müller of Munich Re explained.

“Total issuance in 2016 amounted to $6.7bn and fell below the 2015 level of $6.9bn,” Müller continued, but “With overall maturities of $5.6bn, the market grew with a net capital inflow of more than $1bn.”

The report from Munich Re notes that initial momentum at the start of 2016 was not maintained, after record Q1 issuance then tailed off into the second-quarter, which would usually be considered a peak time for new catastrophe bond issues.

However strong momentum in the third and fourth quarter of the year helped to boost annual issuance to a level which saw the market increase in size by $1.1 billion, on Munich Re’s numbers, over the course of 2016. Outpacing the rate of maturities seen and helping to satisfy some of the pent-up investor demand.

ILS market inflows and outflows ($m)

ILS market inflows and outflows ($m) - Source: Munich Re

While some sponsors did not renew maturing transactions in 2016, which can often be a function of the softened and competitive reinsurance marketplace, Munich Re notes that several new sponsors came to the catastrophe bond market, helping to boost annual issuance.

Pricing remained attractive in the final quarter of the year, Munich Re’s report explains, but according to the reinsurer pricing was relatively static compared to prior years.

Müller explained; “Overall, risk spreads for 2016, across all transactions and perils brought to market, did not drop below previous year’s level despite a high share of new risks.”

As a result the reinsurer says in the report that this signals that; “ILS investors remained disciplined in pricing, and once again displayed appetite for new perils, with diversifying effects reflected in pricing.”

2016 also saw a continuation of the trend towards more customised or specialist catastrophe bond and ILS transactions, with an increase in Japanese perils, a lower share of U.S. wind risk than in prior years, and some new risks, all helping to drive a “broadened and more diversified market.”

“Increased receptiveness for novel risks was also observable in the last quarter of 2016, via the innovative capital market placement of Motor Third Party Liability risk via Generali’s Horse Capital I,” Munich Re continues.

As well as this continued expansion of the market, ILS investors continued to support ceding company needs, with cedent friendly features prevalent in the market in 2016. The vast majority of transactions were indemnity based, which “underlines investors’ comfort with more complex and time consuming UNL mechanisms as well as sponsors’ ability to tap capital markets without incurring basis risk,” Munich Re says.

Almost 70% of issuance featured a variable reset as well, which Munich Re highlights as the highest percentage since the feature was launched in the catastrophe bond market in 2013.

Looking ahead, Munich Re believes it will be hard for the ILS and catastrophe bond market to witness outright growth in 2017, given the record level of maturities scheduled to roll off the market this year.

Also a factor in growth for 2017 is the fact that large deals such as Citizens $1.5 billion Everglades Re, while likely to be renewed in some way, will not need to be as big as the ceding company does not hold as much risk as it did when the record cat bond was issued.

Additionally, “Given the overall shift towards collateralized reinsurance structures among insurers in recent years, particularly in the US, it remains to be seen to what extent sponsors will follow-up on their expiring transactions,” Munich Re notes.

However, there will be significant demand for reinvestment into liquid ILS and cat bonds from some investors, hence ceding companies and potential sponsors are likely to experience similarly attractive conditions in the ILS market in 2017, as demand for new issues will be high.

It is encouraging to hear that Munich Re feels investor discipline remained evident through 2016 as a whole, however spreads definitely have declined going into the end of the year and it will be interesting to see how the first major property catastrophe bonds marketed in 2017 are received.

Artemis’ Q4 2016 Catastrophe Bond & ILS Market Report – Market reaches new heights

Q4 2016 Catastrophe Bond & ILS Market ReportWe’ve now published our Q4 2016 catastrophe bond & ILS market report.

This report reviews the catastrophe bond and insurance-linked securities (ILS) market at the end of the fourth-quarter of 2016, looking at the new risk capital issued and the composition of transactions completed during Q4 2016.

Q4 saw $2.13 billion of risk capital issued from six transactions, exceeding the ten-year average for the quarter by approximately $337 million. Strong investor and sponsor appetite throughout 2016 helped the market end the year at a new record size, of $26.82 billion.

Download your copy here.

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