Institutional investors taking a larger slice of the insurance-linked securities market

Aon Benfield Securities recently published a very comprehensive report on the last twelve months in the insurance-linked securities and catastrophe bond market, which we wrote about here. As well as reviewing the market and transactions from the last year the report also looks at some interesting data points which we felt worth highlighting separately.

The first of those is some interesting insight into the investor landscape in the insurance-linked securities world. Aon Benfield Securities have published some data showing the types of investors that participated in transactions which they were helping to bring to market. This isn’t representative of the entire cat bond and ILS universe, but as Aon Benfield Securities have been involved in a fair number of transactions as arrangers or bookrunners, it gives a good view of the types of investors who have been active in the ILS space during the last twelve months.

This first graphic shows the types of investors who were involved in transactions that Aon Benfield Securities participated in over the last twelve months and compared to the previous year.

Insurance-linked securities investors by type

The graphs above clearly show where the investor landscape has changed from the twelve months ending 30th June 2010 to the last twelve months ending 30th June 2011. The biggest changes are the increase in institutional investors and the decrease in reinsurer participation. This is in line with the commentary we’ve been providing over the last year as we’ve seen increasing numbers of sophisticated institutional investors and pension funds attempt to access the ILS market. It’s interesting to see mutual funds increase as well though, but perhaps this is a problem with classification of certain funds?

Institutional investors have been looking for asset classes which offered a lower level of correlation with the wider financial markets ever since the credit crisis in 2008. Now that the markets are struggling again we’re seeing that trend increase even further. Also, many investors such as pension funds are seeking alternative opportunities to provide a source of diversification in their portfolios, ILS are a perfect diversifier for most of these types of institutional investors and we expect to see that trend increase. The hedge fund percentage is likely to increase over the next twelve months if cat bond issuance is strong as there are hedge funds we are aware of who are ready to launch or to enter the ILS sector for the first time, but they are waiting for the pipeline to re-start after U.S. hurricane season comes to a close.

The other interesting piece of data on the ILS investor landscape that the report provides is the geographic location of investors and how that’s changed over the last year.

Insurance-linked securities investors by country

There have been some even more striking changes in the geographic location of investors than in the type of investor. For example, Bermuda has dropped significantly from 24% down to just 7% last year. Switzerland on the other hand has increased from 18% to 33%. This trend seems to go hand in hand with the drop in reinsurer participation in the other graphs showing types of investor. A number of reinsurance groups have re-domiciled to Switzerland from Bermuda in recent years as well and perhaps this shows the money has followed them.

You can download the full report from Aon Benfield Securities here.