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ILS sector “firing on all cylinders” but continued innovation required: Willis


The insurance-linked securities (ILS) market continues to impress and broaden in terms of products and perils despite spread levels and margins continuing to decline, which is driving a need for further market innovation, according to Willis Towers Watson Securities (WTW Securities).

WTW Securities has released its first-quarter 2017 ILS market report, which reports $1.7 billion of non-life catastrophe bond issuance from five transactions, or 10 tranches of notes, compared with $2 billion of issuance from nine deals in the first-quarter of 2016.

It’s worth noting that WTW Securities’ numbers do differ from Artemis’, as shown by the Artemis Deal Directory and the Artemis Q1 2017 Catastrophe Bond & ILS Market Report. This is due to the inclusion of private, or cat bond lite deals and the inclusion of Merna Re Ltd. (Series 2017-1), a $300 million U.S. earthquake deal that came to market at the very end of the quarter, which aren’t included in the WTW Securities numbers.

“The ILS market is firing on all cylinders in early 2017. There is a robust pipeline with nearly a record level of deals completed. ILS funds are raising capital and putting it to work. Sponsors are responding to the attractive spread environment by seeking new protection backed by liquid ILS (cat bonds) as well as continuing to ramp up protection in other forms. A record year seems possible,” says WTW Securities.

Spread levels in the global ILS sector have exited “free fall” but continue to decline as capital market investors deploy more capacity to claim a greater share of the market, explains WTW Securities.

The volume of alternative reinsurance capital continues to claim an increasingly larger slice of the overall reinsurance market pie, and WTW Securities underlines the expansion of the space in terms of products, perils, and “also in the diversity of ILS investor risk-return appetites.”

Pressures of the ongoing soft reinsurance market cycle, underlined by persistent rate declines in response to an abundance of both traditional and alternative reinsurance capital and intense competition, continues to filter through the risk transfer industry and many of the same challenges are diminishing returns in the ILS space.

Although investors and sponsors in the space clearly remain attracted to the asset class, margins are expected to decline further in the coming months, prompting a need for continued evolution and innovation of the space to find new structures, and ultimately enhance returns.

Commenting on the ILS sector in the opening months of 2017 Bill Dubinsky, Head of ILS at WTW Securities, said; “As expected, assets under management have continued to grow at roughly the same pace as in 2016. This is against a backdrop of challenging market conditions as competition among various players intensifies. Looking ahead we can be confident that the ILS market will continue to expand and grow as reinsurers and other players invest in this space.”

One clear trend identified by WTW Securities in its latest ILS market report concerns the growing use of Puttable Notes as catastrophe bond collateral, especially in the U.S. The report explains that Puttable Notes are debt issued by development banks, and provide LIBOR/EURIBOR returns, which, are “currently enhancing the yield to investors over Treasury Money Market Funds (TMMF).”

WTW Securities explains that the recent uptick in U.S. LIBOR yields means that returns between LIBOR and U.S. Treasurys is far greater than before, which is driving issuers to increasingly opt for Puttable Notes as cat bond collateral as opposed to the more commonly utilized TMMFs.

P&C Cat Bonds using Puttable Notes as Collateral

P&C Cat Bonds using Puttable Notes as Collateral - Source: WTW Securities Transaction Database as of 3/31/2017. Aggregate data excludes private ILS deals with a size smaller than $100 million

The ILS market remains robust and issuance trends continue to impress as the marketplace expands into new regions and perils. With returns expected to remain under intense pressure across the reinsurance and ILS space in the coming months it will be interesting to see if the ILS and cat bond industry can grow again in 2017, and what innovations might come to fruition in the months ahead.

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