Investors show confidence in ILS market

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Investors remain bullish on the insurance-linked securities market after money poured into the alternative insurance and reinsurance sector in the first quarter, leading some experts to predict a record year for ILS investments in 2018.

“We continue to anticipate robust issuance for the remainder of 2018,” said Bill Dubinsky, New York-based head of ILS at Willis Towers Watson Securities.

The surge in investments in catastrophe bonds and other securitized insurance products comes after the 2017 hurricane season caused significant insurance market losses and tested the resilience of ILS investors.

Instead of the losses discouraging investment, however, expectations of catastrophe reinsurance rate increases appear to have attracted more investors to the market.

First-quarter 2018’s record $3.58 billion of property/casualty ILS issued through 10 transactions smashed the previous high points of $2.2 billion in the first quarters of 2016 and 2017, according to a report from Aon Securities Inc.

And the second quarter is already seeing continued investor interest in the ILS market.

“According to our tallies, there has been about $4.5 billion that has already closed” in 12 transactions this year, said Judy Klugman, New York-based co-head of ILS at Swiss Re Capital Markets, the broker-dealer subsidiary of Swiss Re Ltd.

Another $450 million in deals is priced but not settled and some $400 million in deals are in the market being priced, she said. Together with a $350 million deal on which Swiss Re is working, this puts “just over” $1 billion more into the market, Ms. Klugman said.

“Directionally, everything we know would lead us to believe that we should certainly surpass the $10.5 billion of last year,” she said.

Others also see a potential record year.

“Given the record (year-to-date) issuances, we would estimate cat bond new issuances to be in the $11 billion to $13 billion range,” Phillip Kusche, partner and global head of ILS at TigerRisk Partners L.L.C., said in an email.

New and existing investors are showing interest in the ILS market, he said.

“Overall, institutional investors show increased interest in the ILS space, not only in cat bond mandates, and we expect the capital from institutional investors to continue to increase also in collateralized, sidecars and other alternative capital structures,” Mr. Kusche said.

Aon, however, forecast 2018 ILS issuance at approximately $9 billion in a statement accompanying its first-quarter report issued April 26.

The heavy catastrophe losses of 2017 did not sway investors, sources said.

“Our investors have always been acutely aware of what they’re buying, and they understand that they can have losses,” Ms. Klugman said. “They’re eyes wide open.”

The market’s orderly response to the 2017 catastrophe losses helped ease the way into 2018.

The market “obviously had significant momentum in 2017,” said Paul Schultz, Chicago-based CEO of Aon Securities. “We saw the U.S. events and the reaction of the ILS managers and of the space was extremely orderly.”

“Investors were prepared to take losses and have largely seen them as a chance to prove their worth rather than exact payback,” Mr. Dubinsky said.

The prospect of a market-turning event had investors clamoring to pour funds into the sector, Ms. Klugman said.

“When Irma looked as though it was going to be a massive event,” before it made its final turn, “I had investors coming out of the woodwork, some I hadn’t talked to in years, asking ‘How can I participate in this asset class after this event?’” Ms. Klugman said.

“It is our understanding from the ILS managers that they have more capital available to them” than they take in, Mr. Schulz said.

“ILS managers have been very successful in fundraising and were able to replenish, and in most cases, increase their assets under management,” Mr. Kusche said. “The market has been preparing for such events for a long time, therefore we were not surprised by ILS managers being in a position to deploy capital quickly after such a heavy loss year.”

And the catastrophe bond market continues to attract new sponsors, including corporate and government entities, Mr. Schultz said.

“I think we’ll see a few new sponsors come to market this year,” Mr. Schultz said, adding that “what’s already in the pipeline lets us know” about some of these. “We’re going to see a few more and I think we’ll keep expanding” into more of the corporate clients and government entities this year and significantly in the next couple of years.

“Government entity individual insureds accessing ILS is a small but growing area and complements the development of sovereign insurance mechanisms,” such as the (Caribbean Catastrophe Risk Insurance Facility Segregated Portfolio Co.), Mr. Dubinsky said.

“We would expect that public entities such as the World Bank and their clients to continue to explore the cat bond market,” Mr. Kusche said. “The (National Flood Insurance Program) and other public entities are actively investigating if the ILS market can be used for risk transfer,” he added.

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