2012 was a unique year in the insurance-linked securities and catastrophe bond issuance market, with near record issuance, the market reaching a record size, new sponsors coming to market and repeat sponsors continuing to demonstrate their comfort with and commitment to ILS and cat bonds for risk transfer. As well as a healthy issuance side to the market the appetite for taking on cat bond risk was evident in 2012 as the investor base broadened and increased.
According to reinsurer Swiss Re’s latest ILS and cat bond market update report, which we covered earlier this week here, the growing investor base clearly shows the appetite among institutional and qualified investors for taking on reinsurance risk in catastrophe bond form.
2012 saw a shift in the investor base though, as capital inflows showed increasing participation in the ILS market from pension funds and money managers, a trend that Swiss Re expects to see continue through 2013.
The cat bond and ILS investor base has changed over time, with dedicated specialist catastrophe hedge funds still dominating the sources of capital participating in new ILS and cat bond issuances, but increased numbers of pension funds and asset managers taking part. Reinsurers have decreased their proportion of the investor base, although some of this will have moved to dedicated funds as reinsurers seek to step into the third-party capital management space.
The image below from Swiss Re’s report shows a snapshot of the investor base in identical bond structures with a series issued in 2007 and 2012. Swiss Re said that the shift in investor mix is fairly representative of the market as a whole, particularly with index trigger cat bond deals. Asset managers and pension funds are growing their participation in the market which is helping to grow the catastrophe bond markets capital base.
At the same time the dedicated ILS hedge funds are growing their capital base which enables them to remain the dominant source of investment capital in the space and also helps the market to continue to grow.
Read our other article on Swiss Re’s recent report: 2012 a unique year for the insurance-linked securities market: Swiss Re