ILS market could challenge record issuance in 2017: Swiss Re

by Artemis on February 7, 2017

Favourable market conditions and strong investor and sponsor appetite for insurance-linked securities (ILS) suggests that catastrophe bond issuance in 2017 could break records, according to Swiss Re Capital Markets.

Reinsurance giant Swiss Re’s Capital Market’s division has said that catastrophe bond issuance could reach new heights in the coming months, but did warn that an unprecedented volume of scheduled maturities could also see the outstanding market size contract.

According to data from the Artemis Deal Directory at the end of 2016 the outstanding catastrophe bond market reached its largest ever size, at $26.82 billion. However, in order for the market to once again achieve outright growth, Swiss Re’s recent ILS market update notes a need for strong issuance in the coming months, in order to offset a substantial volume of scheduled maturities.

According to Swiss Re’s figures, which differ from Artemis’ due to the inclusion or exclusion of certain deals and also some private catastrophe bond issuances, in the first-half of this year a significant $6.4 billion worth of deals are scheduled to mature.

This includes the largest ever cat bond seen since the market’s inception in the late 90’s, the $1.5 billion Everglades Re Ltd. (Series 2014-1) transaction from Citizens Property Insurance.

In comparison to Swiss Re’s figures, the Artemis Deal Directory shows that roughly $7.2 billion of deals are scheduled to mature in the first-half of 2017, and also a staggering $8.57 billion of deals set to mature in full-year 2017.

But regardless of the difference in expected maturities the message is a similar one; that a strong volume of issuance, and possibly the strongest ever witnessed in the sector is required if the market is to continue down its impressive growth path.

Artemis data shows that the strongest issuance year for the catastrophe bond market was in 2014, when more than $9 billion of new deals came to market.

Swiss Re notes that owing to these dynamics “it would be fair to expect a temporary retraction in the size of the market.”

“However, market conditions are extremely favourable at the moment and pipelines appear to be swelling, therefore it would not be entirely surprising to see the market challenge record issuance. As the old adage goes…records were made to be broken,” continued Swiss Re.

In fact, the reinsurer says that the first-half of the year is already off to a promising start, with more than $500 million of issuance having settled in early January.

According to the Artemis Deal Directory, which again includes private deals that we hear about, catastrophe bond issuance so far in 2017 has reached $1.07 billion.

It remains to be seen if issuance levels in the coming months are able to keep up with maturities and also investor demand, which, in spite of lower returns amidst broader re/insurance market pressures, appear to remain attracted to the diversification and low-correlation aspects of the asset class.

Swiss Re feels that it wouldn’t be a surprise if the market contracted slightly by the end of the year, but at the same time, the reinsurance giant suggests that it’s just as likely the market will have its busiest ever year, in terms of capacity issued.

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