Swiss Re Insurance-Linked Fund Management

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Cat bond & ILS market conditions favourable for an active H2: Swiss Re


After a reduction of new issuance in the global catastrophe bond market in the first-half of 2016, and with just $1.38 billion of maturities to come before the end of the year, reinsurance firm Swiss Re feels conditions are favourable for outright growth through Q2.

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Catastrophe bond and ILS issuance in the first-half of 2016 resulted in a contraction of the outstanding market size at the end of Q2, as issuance levels failed to keep up with continued investor demand.

The Artemis Q2 2016 Catastrophe Bond & ILS Market Report shows that the $1.624 billion of new risk capital issued, as recorded by the Artemis Deal Directory, was the first Q2 since 2011 that issuance failed to reach $2 billion.

The decline in issuance on the back of a record-breaking first-quarter, which saw $2.215 billion of new risk capital issued, saw the outstanding market fall to $25.174 billion at the end of H1.

“We believe that current market conditions, largely influenced by the lack of issuance in 2Q and the large maturities which weren’t renewed, will lead existing sponsors to replenish and top up their programs, and will entice new sponsors to the market.

“With only USD 1.38bn set to expire in the second half and a favourable issuance environment we expect the market to return to, or perhaps surpass, the USD 24.0bn seen at the start of the year,” said reinsurance giant Swiss Re in its July 2016 Insurance Linked Securities market update.

As evidenced by the Artemis Q4 2015 Catastrophe Bond & ILS Market Report, Swiss Re and Artemis numbers for the outstanding market at the end of 2015, and in other quarters for that matter, do differ somewhat.

This is due to Swiss Re not including privately placed deals, such as Market Re Ltd. (Series 2016-2) and Resilience Re Ltd. (Series 1642B), in its numbers when compared to the Artemis Deal Directory.

But despite this, the decline in issuance in Q2 was evident and Swiss Re underlined that the volume of new risk capital issued failed to meet demand, which continues to grow as the acceptance and understanding of the asset class is increasing all the time.

As highlighted by the reinsurance giant, maturities in the second-half of the year total $1.38 billion, which the firm suggests isn’t substantial and that should contribute to a return to overall volume levels seen at the end of 2015, or even higher. Again, the Artemis volume for maturities in the final two quarters of the year is higher than that expected by Swiss Re, at $1.57 billion, owing to private deals that include Dodeka VII and Li Re (Series 2015-1), among others.

According to the Artemis Catastrophe Bond & ILS Market Reports, just two new sponsors came to market in the opening six months of 2016, but favourable issuance conditions should draw more new sponsors to the market in the remaining months of the year, says Swiss Re.

Furthermore, the reinsurer feels that limited maturities will lead existing sponsors to top up their programs as demand from the capital markets for insurance and reinsurance linked business remains strong.

Using Swiss Re’s numbers, at the end of June 2016 the outstanding catastrophe bond and ILS market size fell to $22.3 billion, so down by roughly $1.7 billion on the $24 billion the firm recorded at the end of 2015. It’s not unusual for the market size to shrink in the first-half of the year, notes Swiss Re, as there’s typically a larger volume of maturities in the opening six months of the year.

With $1.38 billion of maturities expected from the beginning of July to the end of December 2016, which would see the outstanding market size decline to approximately $20.92 billion, roughly $3.08 billion or more of issuance is needed through the third and fourth-quarter to ensure the market returns to, or surpasses the level witnessed at the end of 2015.

Data from the Artemis Deal Directory reveals that since 2007 only one year, 2013, has seen combined third and fourth-quarter issuance surpass the $3 billion mark. Even the record-breaking total for cat bond and ILS issuance in 2014 of more than $9 billion saw issuance levels in the second-half of the year fall below $3 billion, at $2.825 billion.

So in order for the market to return to the levels seen at the start of the year it might take a record volume of issuance in either Q3 or Q4 to help the market return to previous levels, or exceed them, ultimately achieving outright growth once again.

But as evidenced throughout the first-half of the year demand for catastrophe bond and ILS business remains strong, and with conditions favourable for new issuance and increased levels of maturities, it will be interesting to see what deals come to the market in the final months of 2016, and whether any deals that do come to fruition are from existing or new sponsors.

Also read:

Cat bond spreads tighten in H1 as demand outpaces issuance: Swiss Re.

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