ILS Market Grows Investor Base
The global insurance linked security [ILS] and catastrophe bond market continues to grow its investor base, drawing in a wider, more geographically balanced pool of investors including 13 percent in Bermuda, 44 percent based in Europe and 36 percent domiciled in the US, Swiss Re says in its annual review of the market.
This comes as institutional investors have shown greater interest in the ILS market during the Eurozone debt crisis.
“Investor interest in the cat bond and ILS market remains strong with new entrants participating in deals or waiting on the sidelines to deploy capital,” said the reinsurer. “Swiss Re sees this trend continuing and leading to a more geographically balanced investor base. Dedicated ILS investment funds remain the core source of capital flowing into the market but Swiss Re interestingly notes that the Eurozone sovereign financial crisis has resulted in more interest in the ILS sector from US life insurance companies, global pension funds, sovereign wealth funds and global money managers.”
The reinsurer said the market has demonstrated resilience after a trying year.
“The first test of the market in 2010/11 was the record catastrophe losses of $108 billion, more than double experienced in 2010, resulting in a number of total loss events for catastrophe bonds,” said the Swiss Re report. “The next challenge was the release of the new US hurricane risk model by RMS which caused a notable increase in the modeled expected loss of many outstanding U.S. wind exposed cat bonds. The Eurozone sovereign debt crisis impacted the wider capital markets but did not particularly impact the ILS and cat bond market.
“Despite these challenges, the market bounced back, and after a lull in issuance caused by model uncertainty issuance rebounded as the primary market started to see more volume coming through.”
The secondary market remained a reliable source of liquidity for investors throughout the challenging events of the year and it was particularly active in Q3 as the hurricane season peaked.
Swiss Re said the lack of primary issuance affected pricing and bid levels until it was clearer that a forward pipeline of deals was coming, once this was understood more sellers came into the market.
“Hurricane Irene triggered significant secondary market trading as the storm approached,” said the reinsurer. “Secondary trading slowed in Q4 as investors held onto capital to put into new issuance, however portfolio adjustment always plays a big part of periods of new issuance so some activity always continues.”
