Stabilisation in terms of growth and pricing was evident in the ILS market during 2015, as rates remained at levels witnessed in 2014, says Munich Re. But with a high volume of maturities expected in the first-half of the year, will investor and sponsor appetite be sufficient to maintain sector growth?
Investor appetite for insurance-linked securities (ILS and catastrophe bond transactions remained strong in 2015 on the back of a record-breaking year for issuance in terms of capital. Reluctance from investors to reduce their minimum return requirements, notes reinsurance giant Munich Re, resulted in pricing staying at levels seen in 2014, and “did not tighten further.”
A notion that supports recent industry commentary underlining the growing maturity, sophistication, and understanding of the asset class, from both investors and sponsors, and also suggests a current trend of stabilisation in both growth and pricing.
A strong level of issuance in the final quarter of last year saw total outstanding capacity in the market increase to $24.3 billion, from $23.9 billion at the end of 2014, according to Munich Re’s figures.
Data from the Artemis Deal Directory also reveals that outright growth was achieved during last year, although the inclusion of certain private transactions means our figures differ somewhat from Munich Re’s, at roughly $25.27 billion for year-end 2014, and $25.96 billion for year-end 2015.
So despite issuance levels in 2015 being roughly $1.5 billion less than the previous year according to Munich Re, and $1.19 billion less according to the Artemis Deal Directory, outright market growth was achieved once again.
“2016 will be a pivotal year for the ILS market,” predicts Munich Re, as more than $3.9 billion of maturities are expected in Q1 and Q2 alone, “which will create substantial liquidity and consequently a strong need to reinvest among investors,” says the reinsurer.
Leading the firm to question whether sponsors will be alert to the high volume of maturities and resulting liquidity, and availability of investor capital, to renew expiring transactions.
Again, it’s worth noting that according to the Artemis Deal Directory $4.52 billion worth of ILS and cat bond transactions are scheduled to mature during the first-half of 2016, over $500 million more than Munich Re expects.
While the renewal of expired deals is vital to the markets continued growth path, the entry of new sponsors and development of new business lines is also a key component of the sector’s outlook for the coming year and beyond.
A reduction of new sponsors in 2015 compared to 2014, and the fact that only 12 out of 21 sponsors with expiring deals launched new issuances during the year, is a reason the market experienced reduced issuance in 2015, says Munich Re.
It’s important to stress that the record-breaking issuance volume seen in 2014 of beyond $9 billion, was significantly helped by the $1.5 billion Everglades Re Ltd. (Series 2014-1) deal, the largest ever cat bond brought to market.
“With the biggest part of maturing volumes during Q1/Q2 2016 coming from strategic sponsors, the market should see sufficient issuance activity to absorb this liquidity. Nonetheless, some of the expiring cat bond covers could be shifted to the collateralized reinsurance market,” explains Munich Re.
A valid point, and one that highlights the consistent growth of the collateralized reinsurance market, as some investors might wish to deploy capital into ILS transactions outside of the cat bond space. It also highlights the fact that there remains work to do in making the catastrophe bond issuance process as simple and cost-effective as collateralized reinsurance transactions.
Artemis highlighted recently how issuance and maturities trends in the ILS space suggest that as is typical, the overall market size will likely contract at mid-year 2016 with the majority of deals set to expire during H1.
Munich Re predicts issuance levels to exceed $6 billion during 2016, noting that the overall market size will again grow, with a total $5.32 billion worth of maturities expected before year’s end.
Artemis’ data puts the total volume of maturities for 2016 at roughly $6.08 billion, but as the issuance levels we record are typically higher than those reported by reinsurers such as Munich Re, owing to the inclusion of privately placed deals, it wouldn’t be surprising to see the outstanding cat bond and ILS market reach new heights at the end of the year, perhaps surpassing the $26 billion mark for the first time.
Throughout 2016 Munich Re predicts pricing in the cat bond and ILS space will remain at current levels for all perils, for the most part. Adding that it expects “the aforementioned liquidity, coupled with a persistent low interest environment, to continue driving demand for ILS among investors.”