Insurance-linked securities (ILS) activity was up significantly year-on-year in the first-quarter of 2018, as catastrophe bond issues accelerated and investor appetite remained strong, following the impacts of major catastrophes in 2017. This puts the market in a strong position for the mid-year renewals, as it is now reloaded and ready to go, according to Willis Towers Watson Securities.
In the firms latest quarter ILS and catastrophe bond market report, Willis Towers Watson Securities (WTWS) notes that, “Far from recoiling from loss events in 2017, ILS investors are reloaded and ready for the 1 June 2018 Florida renewals.”
WTWS recorded $3.1 billion of underwritten, broadly distributed non-life ILS capacity issued through twelve catastrophe bonds transactions, up significantly on the $1.7 billion through five bonds in the same quarter of 2017.
That’s lower than the $4.24 billion of new risk capital brought to market through 17 deals that we at Artemis recorded, including private syndicated transactions, life related risks and other perils.
However it was a record quarter, on both sets of numbers, reflecting the ability of the ILS sector to bounce back from its largest ever losses and trade forwards effectively, to provide continuity in reinsurance and retrocession coverage to ceding companies.
WTWS reports the outstanding non-life cat bond market as reaching $26.6 billion by the end of the quarter, representing $1.1 billion of growth and a new record high.
Again, this is below the $32.83 billion and almost $1.8 billion of growth that we at Artemis recorded, across all of the catastrophe bond and syndicated ILS transactions we track in our Deal Directory.
WTWS notes that the majority of the cat bond deals it tracked in the quarter were market-diversifying transactions, including the first-time issuances from the Chilean, Colombian, and Peruvian governments, as well as repeat transactions from regular Japanese cedants Zenkyoren, Mitsui Sumitomo Insurance, and Tokio Marine & Nichido Fire.
Noteworthy is the fact that because of this diversifying issuance, WTWS reports that just 63% of outstanding capacity is now exposed to U.S. Wind, which it says is the lowest in the last ten years.
In fact this trend has been developing in recent years, as the volume of diversifiers in the marketplace has increased significantly recently. It’s a trend that’s expected to continue as well, as more types of perils are placed with ILS investors. You can track the mix of perils in the market in one of our charts.
Commenting on the first-quarter ILS and cat bond issuance, William Dubinsky, Managing Director and Head of ILS, said that the growth trend in the insurance-linked securities (ILS) market is expected to continue, noting that it could take a really unusual loss event to dampen investor appetite for reinsurance as an asset class.
“We expect the current trends in ILS growth to continue. Without a true surprise loss, like an ice-storm in Miami, end-investors will continue to allocate capacity to ILS,” Dubinsky explained. “Yield increases under government bonds are expected to be neutral or maybe even slightly positive for issuance and asset growth, and even more importantly, we will continue to see a trend towards true syndication, reducing the power of large leading markets. All this will put the reinsurance market’s traditional pricing cycle on life support.”
The fact the pricing cycle is on life support should come as no surprise, this has been evident for a number of years now. But the fact ILS markets took their losses, came out the other side larger and more influential has now proven this fact beyond doubt.
In fact, WTWS notes that the thesis that ILS investors would exit the market after major losses and when interest rates has been proven wrong, saying that the proponents of such ideas were “talking their books.”
In fact investors were more than prepared to take their losses, as sophisticated institutional investors are aware that they will take losses over time from the type of catastrophe events that hit their TV screens.
Dubinsky said, “Some reinsurers and pundits have told anyone who would listen that rising interest rates would cause ILS to disappear. This has been proved wrong.”
Notably, WTWS says, “The investors were so well prepared that many former investors, not currently active in the sector, looked at reengaging post-event.”
This goes someway to explaining the growing capital base of the ILS market, which now stands at a level approaching $100 billion. We have ILS fund managers controlling roughly $94 billion of ILS assets listed in our directory here.
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