Reinsurer Swiss Re has published their insurance-linked security and catastrophe bond market update which looks back at 2011, highlighting some of the issues faced and successes achieved and looks to the year ahead discussing what 2012 might bring for the ILS sector. As one of the most active sponsors of catastrophe bonds, an active participant in other transactions and an active secondary market trading participant, it’s always interesting to hear Swiss Re’s perspective on the market.
As with most of the recent ILS market reviews Swiss Re discusses the difficulties that the market faced during 2011 and notes that it remained resilient in the face of multiple challenges. The first test of the market the report mentions is the record catastrophe losses of $108 billion, more than double experienced in 2010, resulting in a number of total loss events for catastrophe bonds. The next challenge was the release of the new U.S. hurricane risk model by RMS which caused a notable increase in the modeled expected loss of many outstanding U.S. wind exposed cat bonds. The Eurozone sovereign debt crisis impacted the wider capital markets but did not particularly impact the ILS and cat bond market. Despite these challenges, the market bounced back, and after a lull in issuance caused by model uncertainty issuance rebounded as the primary market started to see more volume coming through.
The secondary market remained a reliable source of liquidity for investors throughout the challenging events of the year and it was particularly active in Q3 as the hurricane season peaked. The lack of primary issuance affected pricing and bid levels until it was clearer that a forward pipeline of deals was coming, once this was understood more sellers came into the market. Hurricane Irene triggered significant secondary market trading as the storm approached. Secondary trading slowed in Q4 as investors held onto capital to put into new issuance, however portfolio adjustment always plays a big part of periods of new issuance so some activity always continues. Swiss Re Capital Markets’ trading desk achieved an average monthly volume over the year of $73m and finished the year with over $875m in trading making them one of the largest desks in the market.
Investor interest in the cat bond and ILS market remains strong with new entrants participating in deals or waiting on the sidelines to deploy capital. Swiss Re see’s this trend continuing and leading to a more geographically balanced investor base. Dedicated ILS investment funds remain the core source of capital flowing into the market but Swiss Re interestingly notes that the Eurozone sovereign financial crisis has resulted in more interest in the ILS sector from US life insurance companies, global pension funds, sovereign wealth funds and global money managers.
As with all of the ILS market annual review reports that we’ve covered recently, they should be required reading for anyone interested in the sector. We will cover a few more topics from this report over the coming days. You can download the Swiss Re report here.