S&P say insurance-linked securities market coped well with turbulent start to year

Ratings agency Standard & Poor’s say that the insurance-linked securities and catastrophe bond market has coped well with the turbulent catastrophic events and market impacting incidents seen in the first half of the year.

In a report published today titled ‘Insurance-Linked Securitization: Navigating Through A Turbulent Start To 2011’, S&P run through the events which have made an impact on the ILS and cat bond market. We’ve covered these events in detail previously, you just have to search our archives (use the search box to the right) to find our coverage, but here’s a quick run down of what the report covers.

The catastrophic events and large catastrophe losses obviously get a mention, with particular reference to the Japanese Tohoku earthquake and tsunami. S&P say that catastrophe bonds which were exposed to this event behaved as expected, which in our view helps to demonstrate the value of well structured ILS transactions.

They also discuss the RMS U.S. hurricane model update which has created some discussion and analysis within the market as both issuers and investors came to terms with the new view of risk. On this S&P say that these models are updated regularly but rarely (if ever) with such a huge change in expected loss of cat bonds using the modelling tool. As such they say this can be considered an exception. The market reacted in a restrained manner to this change and while issuance slowed it is picking up again.

So the insurance-linked securities market had a lot to deal with during the first half of 2011 and the fact that issuance slowed during Q2 (historically a quarter of peak issuance) is on reflection no surprise. The fact that the market has bounced back to produce new issuance of good diversifying transactions in Q3 is testament to the market resilience and maturity.

Issuance in the third quarter is now heading for record levels, with over $600m issued so far from four transactions (details of which can be found in our Deal Directory). With most market commentators and sources we speak to predicting large amounts of issuance after this years hurricane season we could still see a decent annual level of issuance, although it is unlikely to break any records.

The other interesting development this year is the return of directly issued cat bonds (such as the CEA’s Embarcadero Re), new types of risk being planned for issuance in private deals that we are aware of and the private transactions performed by Clariden Leu and others. With those trends likely to grow we could see the market increase in size again by mid-next year.

You can access the report via the S&P website if you are a Global Credit Portal subscriber.