Recent ILS trends suggest another busy year ahead: Estera (Bermuda)

The insurance-linked securities (ILS) market continued down its growth path in 2018 with both peril region and product diversification, and, according to Janita Burke and Sherman Taylor of Estera’s Bermuda office, more of the same is expected in the year ahead.

Artemis recently spoke with Burke, Client Director, Estera Services (Bermuda) Limited, and Taylor, Associate Director of Estera Management (Bermuda) Limited, about recent ILS market trends.

The pair explained that throughout last year, the global capital markets invested billions of dollars of fresh capital into insurance and reinsurance risks via innovative ILS structures, adding that in 2019, more of the same is expected.

“Insurance linked securities (ILS) have long proven attractive as a means of diversifying investment portfolios and reducing exposure to market volatility. ILS issuances have increased steadily over the past decade with 2018 seeing another record year for the ILS market, with ILS funds again providing large amounts of new capital.

“A considerable uptick sets 2018 apart with a broadening of the types of risks and geographical locations covered, with the total amount of capital under management at ILS funds now estimated to be between US$102 – $150 billion (Artemis). This figure signals a strong appetite for the asset class amongst institutional investors.

“The solid growth in the number and size of ILS deals seen in 2018 is a clear indicator that the market is poised for further growth in 2019. 2018 also saw some very interesting expansion of the reach and diversity of ILS products,” said Burke.

The new developments noted by Burke include the issuance of the first wildfire indemnity corporate catastrophe bond transaction, being the $200 million Cal Phoenix Re Ltd. (Series 2018-1) issuance sponsored by PG&E Corporation.

Furthermore, the Federal Emergency Management Agency (FEMA) entered the space in 2018, securing $500 million of reinsurance protection for the National Flood Insurance Program (NFIP), via issuer FloodSmart Re Ltd. (Series 2018-1).

Furthermore, explained Burke, 2018 witnessed the first ILS transaction that covered financial guarantee risks, as well as continued expansion of the mortgage ILS space, alongside both operational and credit default risks.

“In June 2018, for example, a new US$150 million operational risk ILS deal came to market, securing investor support for fully-collateralised reinsurance to back an operational risk insurance agreement.

“This is only the second deal of its kind, and the fact that it covers a range of corporate risks only strengthens the case for further market expansion and growth of ILS with coverage becoming increasingly flexible and moving beyond its early days of exclusively hurricane and other natural disaster risks,” said Burke.

While the introduction of new ILS products and the expansion of the marketplace is positive for future growth, Estera’s Taylor told Artemis that one of the most “heartening” things about the market’s performance last year, is that it strengthened even on the back of a series of insurance industry losses in the second-half of 2017.

“Several hurricanes and wildfires in the second half of 2017, plus the Puebla earthquake that struck Mexico in September that year with a magnitude of 7.1, combined to raise concerns that the capital markets might step back from ILS investments; however, the opposite proved to be the case as investor appetite for ILS products remained strong despite those 2017 loss events,” said Taylor.

Looking forward, both Burke and Taylor highlighted the multi-industry expertise and sound regulatory infrastructure Bermuda offers, which they feel helped the island maintain its leading position as an ILS domicile of choice in 2018.

“Looking forward to 2019, we anticipate that Bermuda’s blue-chip reputation will benefit further from new legislation including economic substance legislation that underscores and builds on the island’s commitment to tax transparency and its reputation for compliance with global standards. Another example is Bermuda’s anti-money laundering and anti-terrorist financing standards which meet US and UK standards.

“Speed to market and price competitiveness continue to be stand-out advantages for Bermuda as the ILS market continues to look for greater efficiency in an environment of thin profit margins. Bermuda’s digital assets legislation regime is also noteworthy, and has already attracted interest from the ILS industry,” said Burke.

Taylor, added: “The Bermuda Stock Exchange (BSX) continued to play a key role in the global ILS market as it listed a large number of new ILS products in 2018; the fully electronic stock exchange features pragmatic regulations that easily accommodate ILS. The BSX is likely to continue to be the stock exchange of choice for the ILS market into 2019 and beyond.

“In summary, we expect growth in the ILS market in 2019, although the capacity of the ILS industry to bring the deals to market may be a limiting factor as investor appetite outstrips availability of ILS products in the marketplace.

“2019 may be the year that much discussed cyber risks enters into the ILS market; and it is also possible that we may see some marrying of Bermuda’s budding Fintech industry with the ILS market.”