This morning, German reinsurance giant Hannover Re noted the resurgent insurance-linked securities (ILS) market, highlighting that it has returned to growth after a few years where capital allocated to ILS and catastrophe bonds had declined a little.
The reinsurance company noted that, “The market for insurance-linked securities (ILS) posted renewed growth after modest declines in the previous years and is heading towards a volume of EUR 100 billion.”
In part, this has been helped by the positive rate movements seen across the entire reinsurance and insurance-linked securities (ILS) sector, Hannover Re explained this morning.
The reinsurer said that new issuance of catastrophe bonds will “very likely exceed the old high” in 2021, with a record year anticipated by the company.
One other factor that Hannover Re highlights as a driver of ILS market resurgence over the last year, is that, “Over the past few years catastrophe bonds – unlike other ILS investments – have been impacted less heavily by losses such as Covid-19.”
Hannover Re plays a role in the ILS market as a fronting provider and partner to investor capital, helping ILS investors and funds access reinsurance business on a collateralised basis.
The reinsurer also works with catastrophe bond issuers to help them access the capital markets, sitting in the middle of the reinsurance flows within a cat bond structure to enable risk to be passed through to ILS investors.
Here, Hannover Re notes continued success, saying that in 2021 so far the reinsurer has, “brought four catastrophe bonds to the capital market for US clients with a total volume of around USD 1.4 billion.”
Alongside these natural catastrophe focused ILS activities, Hannover Re is also increasingly involved in life related ILS transactions.
The company noted that, “A particularly gratifying business development in recent years is the transfer of life and health reinsurance risks to the ILS market in a total amount of roughly USD 800 million including coverage of extreme mortality risks.”
In addition to the fronting and service provision in ILS, Hannover Re also invests in the catastrophe bond market, which it says allows the company to maximise all the opportunities offered by the ILS market.
Finally, Hannover Re also uses ILS capital within its own retrocession program.
Looking ahead, Hannover Re said that for ILS the reinsurer expects that, “Demand is expected to show moderate growth overall in the coming years.”
It’s worth remembering hear that Hannover Re is a top-four global reinsurer.
So for the company to forecast increasing demand for ILS products is telling, as it suggests an increasingly embedded capital markets in global reinsurance risk trading, providing opportunity to the ILS investment community, but also to reinsurers, like Hannover Re, that are able to offer their balance-sheet as a service to ILS market players.
CEO of Hannover Re Jean- Jacques Henchoz also noted that Hannover Re sees a growth opportunity in ILS currently, during a media briefing this morning.
Henning Ludolphs, Managing Director – Retrocession and Capital Markets at Hannover Re, said this morning at a briefing that he expects growth in cat bonds as well.
“Catastrophe bonds are currently en vogue and investors like catastrophe bonds, which means the number of catastrophe bonds will increase,” Ludolphs said.
But he added that this will not necessarily change the mix between cat bonds and collateralised reinsurance, which he expects will remain roughly 1/3 to 2/3’s of the ILS market
“Investors in catastrophe bonds are eager to invest so the prices have become attractive to issue new cat bonds. But it won’t change the volumes dramatically,” he explained.
Adding that, “This year we expect to see a new record high in cat bonds. So the numbers are going up but they do not shift the needle dramatically to either side,” he explained on the ILS market’s mix.
Ludolphs was also asked whether he felt the ILS market would face losses from recent flooding in Europe and Germany, to which he explained, “In general, collateralised reinsurance investors will feel relatively more losses than cat bond investors.”