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Catastrophe bonds attract investors despite concerns over lack of information

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NEW YORK — Investors and advisers expressed optimism for continued growth and support of the insurance-linked securities market even as they discussed the need for greater transparency and disclosure.

“We should all be optimistic about prospects for the coming year,” said Bill Dubinsky, head of insurance linked securities for Willis Capital Markets & Advisory in New York.

One advantage insurance-linked securities offer institutional investors is that such securities are not correlated with the broader equity and debt markets and thus offer investment diversification.

“For most investors, they are really attracted to the asset class for the diversification benefit,” said Todor Todorov, senior investment consultant — hedge fund research, for Willis Towers Watson P.L.C. in New York.

“I think it surprised people in terms of its uncorrelated nature, again, especially the new investors,” said Jonathan Malawer, managing director and senior investment analyst for K2 Advisors L.L.C. in New York, adding that 2015 was “such a challenging period for financial markets.”

“Investors continue to grow assets under management notwithstanding the softer market,” said Mr. Dubinsky on the sidelines of the 16th annual Insurance & Risk-Linked Securities Conference sponsored by the Securities Industry Financial Markets Association last week in New York, where Mr. Dubinsky was co-chairman of this year’s conference.

“Total nonlife ILS capital reached $70 billion at year-end 2015, and net new capital continues to flow into the space,” said Mr. Dubinsky.

Mr. Malawer said he believes the ILS market has staying power. “I think investors are in it for the long-term for sure,” he said.

“We came to this market with a long-term view,” said Dan Bergman, head of investment research and insurance-linked securities, Third Swedish National Pension Fund, Stockholm, Sweden.

Diversification was part of the draw, he said.

“We came to this market for diversification,” said Mr. Bergman, adding “but not only for that,” emphasizing that returns were equally as important and portfolios are adjusted as such.

“We’ve now worked in this market space for 10 years, and we don’t plan on leaving, but we do move allocations up and down,” said Mr. Bergman.

As the market grows and expands, it encounters new demands and challenges, high among them concerns over disclosures of losses to catastrophe bonds.

“As the 144A market has expanded with many more catastrophe bonds with indemnity triggers, there’s been a greater need for real-time disclosure to investors with regard to losses,” said Michael Groll, a partner in the corporate insurance and regulatory group of Willkie Farr & Gallagher L.L.P. in New York, referring to one leading ILS format under U.S. Securities and Exchange Commission regulations.

His views were echoed by John DeCaro, founding principal and portfolio manager with Elementum Advisors L.L.C. in Chicago.

“As an investor, we are desirous of as much information as possible,” said Mr. DeCaro.

There was confidence, however, that this would happen.

“Our view is that over time disclosures will increase,” said Ben Rubin, executive vice president, capital markets for Axis Re U.S. in New York.

Although catastrophe bond issuance declined to $6.9 billion in 2015 from $8.0 billion in 2014, the sector is still showing promising signs of growth, according to insurance industry reports.

Both Aon Benfield Securities and Swiss Re Ltd. say in reports issued Jan. 21 and Jan. 22, respectively, that 2016 catastrophe bond issuance could reach $7 billion.

Meanwhile, Willis Capital Markets & Advisory, a Willis Towers Watson unit, notes in a report issued Jan. 19 that the 2014 total was bolstered by the largest single catastrophe bond ever issued, the $1.5 billion Everglades Re Ltd. from Citizens Property Insurance Corp., a bond providing coverage for Florida windstorms that was upsized more than once due to strong demand.

“Looking at the headline catastrophe bond figure, a decline in issuance appears to be the case. However, this general picture fails to account for the huge $1.5 billion transaction completed in 2014 — Citizens’ Everglades Re — which skews any prior-year comparison,” said Mr. Dubinsky in a statement accompanying the Willis report.

The Aon report, “Insurance-Linked Securities Year-End 2015 Update,” also noted that 2015 saw a record level of catastrophe bond maturities at $6.8 billion.

The Swiss Re report, “Insurance Linked Securities Market Update, Volume XXIV, January 2016,” notes that this trend will continue with close to $4 billion worth of scheduled maturities in the first half of 2016.

Growth in the ILS sector in 2015 could also be seen by an important expansion in geography and covered perils as the first catastrophe bond was launched in China.

The third quarter saw four transactions including Panda Re Ltd., the first China-exposed catastrophe bond, which provides $50 million of earthquake coverage for China Property and Casualty Reinsurance Co.

The fourth quarter saw six transactions including Kilimanjaro Re Ltd. which provided a total of $625 million of U.S., Canada, and Puerto Rico hurricane and earthquake coverage for Everest Reinsurance Co.