Insurance-linked securities market to achieve absolute growth in 2011, predicts Swiss Re

At a press briefing held at their London offices this morning, Swiss Re predicted that the insurance-linked securities and catastrophe bond market will return to absolute growth during 2011 following three years where outstanding risk capital contracted.

Since 2007 the ILS and catastrophe bond market has been contracting in size as the volume of transactions maturing has outstripped the volume of new issuance. 2010 has been no different. Swiss Re predict that by year-end we will have seen $4.8 billion worth of new ILS issuance and $6.2 billion of maturing ILS transactions. This means that risk capital outstanding has been on a general decline during the last few years.

We wrote last month that 40% of outstanding risk capital is due to mature by the end of June 2011 according to Guy Carpenter. Swiss Re say that they see $4.6 billion of ILS issuance maturing during 2011 which means the market has a very good chance to outstrip that in new issuance and thus achieve positive absolute growth for the first time since 2007. A glut of transactions issued during 2007 have matured or are due to mature in the coming months and Swiss Re expect a lot of this investor capital will be re-invested into the market.

Outstanding notional capital stands at $12.5 billion at the moment but Swiss Re says a strong deal pipeline into the last few weeks of the year could see the year end outstanding notional risk capital figure closer to $14 billion. Investor demand remains strong and new sources of investor capital are beginning to show, Swiss Re particularly referenced pension funds as a new sector expressing growing interest in ILS as an investment asset class.

2010 will end as the third highest year of issuance in the history of this market, outstripped only by 2006 and 2007. The 4th quarter of 2010 has been particularly active, and with more deals to come Swiss Re said they projected Q4 2010 to be the third highest quarter of issuance, while Q2 2010 will b the fourth highest.

Diversification and the issuance of new perils was a key theme during the press briefing and Swiss Re say they expect to see further bonds exposed to new non-life perils issued before the end of 2010.

Other predictions for 2011 from Swiss Re include; a continued trend of price convergence towards reinsurance which could help to attract new sponsors, growth in the insurance-linked securities market for non-U.S. catastrophe risks and that demand for simple, index-based deals will remain strong (as they are easy for investors to understand and for sponsors to have structured).

The outlook for the catastrophe bond and insurance-linked securities market in 2011 is certainly looking healthy. You only need to look at the recent deals added to our transaction directory to see the innovation and diversification coming to the fore. Could 2011 be a record year? It’s certainly possible although we feel unlikely that issuance would outstrip the $ size of 2007 but we could see a large number of deals aiming to soak up the increasing investor demand. However the market reacts and expands in 2011, one thing is for sure, insurance-linked securities remain a serious piece of the risk management, risk transfer and reinsurance mix.