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Insurance-linked securities market well-positioned for sustained growth

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Record second-quarter issuance in the insurance-linked securities market is a strong indicator of a market poised for continued growth, according to experts.

“It’s an asset class that’s growing,” said Gary Martucci, director of global insurance ratings at New York-based ratings agency Standard & Poor's Corp. “I think (the record issuance) is indicative of an asset class that is attractive to buyers and sellers and will experience growth over the next several years.”

End of second quarter bonds outstanding saw double-digit growth to $24.7 billion, up 16.5% year-on-year, according to the report, showing ongoing confidence in the market as investors returned.

“A lot of people looked at the amount of capacity rolling off in the first half of 2017 and questioned whether the market would replace it,” said Bill Dubinsky, head of ILS at Willis Towers Watson Securities in New York. “There really was a question out there.”

The report also says that 2017 will be a record year for total property/casualty issuance “based on where we are relative to the numbers we are trying to match,” he said. “There usually are very few deals in the third quarter, but in the fourth quarter there are going to be a good number of deals.”

The market’s $6.3 billion of property/casualty catastrophe bond capacity issued through 36 tranches during the second quarter of 2017 surpassed the previous second quarter record of $4.5 billion issued in the same period of 2014 and was six times the $1.0 billion issued through 17 tranches in the second quarter of 2016, according to a new report, “ILS Market Update: At a Crossroad, July 2017,” from Willis Towers Watson Securities, the investment banking business of Willis Towers Watson P.L.C. 

Large deals helped drive the record quarter, including two of the largest ever catastrophe bond transactions, Everest Re Group Ltd.’s Kilimanjaro II Re 2017-1, which totaled $1.25 billion over six tranches of notes, and the California Earthquake Authority’s $925 million Ursa Re 2017-1, according to the Willis report.

In addition, there was Axis Capital’s Northshore Re II at $350 million, Citizens Property Everglades Re II at $300 million, and the Texas Windstorm Insurance Association’s Alamo Re at $400 million.

“When you are issuing these types of bonds, size matters,” Mr. Martucci said. “You can allocate the costs of setting up the issue, the underwriters, the risk modelling, over a much larger base, which from a buyer’s perspective can be attractive,” while sellers also benefit from economies of scale. “When you look at the deals, a $300 million or $400 million deal is not unusual.” 

The quarter also featured a large portion of U.S deals, now more attractive to investors as risk-free interest rates such as short-term U.S. Treasury yields rise. “In the U.S., there was an increase in collateral yields, which flows through to the investor,” said Mr. Dubinsky.

He added that this dents the notion that capacity will leave the sector in search of yield as rates rise, the theory being that rising interest rates will cause opportunistic capital to wane. “A lot of people have said that when interest rates rise, that the ILS investor capital will disappear,” Mr. Dubinsky said, adding that rising U.S. interest rates “are really a wind at the back of capital markets.