1. The insurance-linked securities (ILS) market has enjoyed significant growth this year, with non-life capacity issued or outstanding at a near-record high, research by Willis Re has uncovered.
2. The findings show that there was $27.3bn (£21.2bn) of non-life capacity issued or outstanding at the end of the third quarter, exceeded only by the $27.8bn recorded for all of 2018.
3. However, the researchers warned that the rising tide of alternative capital would not lift all ships, with some managers, sectors and strategies benefitting, while others remain under stress.
4. For example, capacity remains restricted for ultimate net loss (UNL) retrocession, with only limited interest so far from new investors.
5. Meanwhile reduced loss creep, higher premiums, and the associated improved risk-return profile have provided a tailwind that should prompt new issues.
6. Investors are realigning their portfolios towards investments with lower projected losses, as they see increasing relative value at the more remote end. That could bode well for cat bonds. Sidecar interest has picked up as well, but the extent to which this will translate into deals will depend on the opportunities presented to investors
7. The researchers said that a desire to satisfy unmet needs, such as closing the disaster gap or helping pensioners diversify their investments, was prompting the transfer of new risks.
AN ALTERNATIVE TO FIXED INCOME
1. Insurance-linked securities are coming back into favour as an alternative to fixed income, following a general repricing of yields that has happened since the beginning of the year.
2. Olivier Marion, senior investment specialist in alternative investments at UBP Asset Management, said yields on catastrophe bonds and insurance-linked securities (ILS) are on the rise, particularly in the wake of typhoon Hagibis in Japan and Hurricane Lorenzo in the UK.
3. The asset class is a strong diversifier in fixed income, credit and equity portfolios as it is uncorrelated to traditional asset classes, he said. This is while ILS are typically less volatile than traditional safe havens such as gold.
4. Yields on catastrophe bonds and ILS more broadly can go up to the high single digits, in contrast to US 3-month T-Notes and 10-year treasurys, which are currently yielding around 1.7%.
5. At the end of June, the average coupon offered by cat bonds in the primary market stood at 6.79% and the related average multiple, which represents the coupon divided by expected loss, reached a five-year high of 2.90.
6. This higher risk premium has also been observed among OTC instruments, specifically during the April renewals, with a 25% repricing on programmes covering Japanese typhoons, and during the June and July renewals where a 10-30% repricing for US wind insurance programmes was seen.
SUBSCRIBING TO ILS
1. There has been a negative mark-to-market effect in the secondary market in 2018 and 2019, since 2017 and 2018 were very costly years for the reinsurance industry following some extreme hurricane and wildfire events. This is while loss estimates on such natural catastrophes have been generally upgraded
2. it is reasonable to expect ILS to continue performing well as long as (i) market dynamics continue to improve and (ii) the end of the year remains relatively quiet in terms of major natural events (US hurricanes and earthquakes in particular).
3. Position sizing and active management are crucial in this market. ‘ILS’ unique features explain 80% of the benefits offered by the asset class; the remaining 20% comes from the manager’s market access and expertise in research, risk modelling and portfolio construction.
Source:
https://www.theactuary.com/news/2019/11/non-life-ils-capacity-hits-near-record-high/
https://citywireselector.com/news/insurance-linked-securities-an-alternative-to-fixed-income/a1297336
