The first-half of 2012 was the second most active such period of insurance-linked securities and catastrophe bonds issuance since 2007. The approximately $3.6 billion of newly issued ILS, predominantly cat bonds, in the first-half is evidence of insurers, reinsurers and investors all showing their commitment to the ILS market, says reinsurer Swiss Re in its latest ILS market update report which was published today.
ILS and cat bond issuance saw a resurgence at the end of the 2011 hurricane season as sponsors returned to the market seeking to lock in cover ahead of 2012. After the slowdown in issuance which began in March 2011, after the Tohoku quake and tsunami and as the market digested model changes, investors were eager to participate in new transactions meaning that pricing could be attractive in some cases. Swiss Re says that both new and repeat sponsors have been attracted by the diversifying capacity available from the capital markets via ILS as well as by the increasingly competitive pricing which is becoming more comparable to traditional reinsurance.
Inflows of capital continued to be strong through the first-half of 2012 with ILS fund mandates from large U.S. and international pension funds becoming a recurring theme. There’s been a trend for primary insurers to utilise indemnity triggers in cat bonds this year and Swiss Re says that investors have become comfortable with these structures. The report says that all of these positive factors of ILS market development, combined with a slowly hardening reinsurance market, have led companies to ILS and cat bonds.
Swiss Re’s report goes into some detail on the new transactions which came to market during the first-half of 2012 and also goes into more detail on its own Combine Re cat bond which saw it provide two insurers with separate limits in a shared cat bond transaction. The first-half of 2012 was only $237m away from beating the 2007 H1 issuance record, and 2012 H1 issuance was approximately double that seen in 2011.
U.S. hurricane risk dominated the ILS market in 2012 being involved in 23 out of 28 tranches that were issued. This has increased the U.S. hurricane top-heavy nature of the market which we now believe makes up close to 75% of outstanding cat bond limit. Other perils that featured in H1 2012 were Japanese earthquake, Japanese typhoon, California earthquake and extreme morbidity.
Swiss Re note that the first quarter of 2012 saw record issuance but the second quarter did not and make an interesting observation that some sponsors have brought hurricane cat bonds to market earlier in the year than they historically might have. The cat bond market has typically seen the bulk of U.S. hurricane cat bonds come to market in Q2 but this has become more evenly spread in the first-half in 2012. Swiss Re puts this down to improved execution in the first quarter becoming more evident and sponsors taking advantage of this. We feel that for some sponsors this could be attractive as it allows them to bring the date that cover incepts more closely inline with their January renewals, which can be attractive for budgeting purposes.
The rate of issuance has outstripped the rate of maturities in the catastrophe bond and ILS market in 2012 and this is likely to continue through the rest of the year. Swiss Re note that just $1.1 billion of bonds are due to mature before the end of 2012 meaning that for the market to attain overall growth in 2012 is eminently possible and likely. It would be the first year since 2007 that the ILS and cat bond market had achieved outright growth, and Swiss Re says that the signs are clear that this growth is likely to happen. At the end of the first-half of 2012 Swiss Re measured the size of the outstanding ILS and cat bond market at $14.7 billion.
Swiss Re says that it is optimistic for new ILS issuance in 2012. They close this section of the report with the following; “It remains clear that sponsors view the ILS market as an important part of their risk management programs, and as a source of multi-year collateralized reinsurance protection. The broad investor base sees value in a diversifying and non-correlated asset class. Due to these factors, the ILS market is likely to continue to grow in the future.”
We’ve written a number of times about the changing mix of triggers used in cat bond deals this year, which has seen indemnity triggers become the dominant structure of choice, particularly for primary insurers. Indemnity triggers can be more closely matched with an insurers wider reinsurance coverages and so a cat bond can be neatly structured to provide cover for the precise layer a sponsor requires. Swiss Re provide an interesting look at the trigger used in cat bond deals during the first-half of 2007 versus the triggers used in the first-half of 2012. Indemnity triggers now account for over half of the issuance seen in H1 2012 (see chart below).
The report from Swiss Re contains additional insights into the ILS and cat bond transactions which came to market in the first-half of this year, some details on secondary trading trends and some data on the market as it stands today. We will likely cover some of these additional insights in the coming days but for now you can find the full report in PDF format here.