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ILS issuance slows in third quarter, market tested by catastrophes

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A quarter of slow insurance-linked security issuance but remarkable catastrophe activity may be a “wake-up call” for the ILS market, according to a report by Willis Towers Watson Securities.

The new report, ILS Market Update Wake-Up Call October 2017, issued Friday by the investment banking arm of Willis Towers Watson P.L.C., comes after a record second quarter issuance that pushed 2017 past the yearly record issuance with half a year left.

The third quarter, “typically slow,” according to Willis Towers Watson Securities, saw $460 million of property/casualty catastrophe bond capacity issued through two catastrophe bonds, compared with $925 million issued through two bonds in the third quarter of 2016, according to the report.

The real issue, however, was the level of catastrophe losses expected from the string of hurricanes and other events during September and October and what effect this would have on the ILS market, according to the report.

“Q3 brought us typically slow ILS activity coupled with atypical disaster activity ranging from earthquakes in Mexico to Hurricanes Harvey, Irma and Maria. What does this activity mean for the market? Will the market respond as expected? How will ILS influence the broader market?” Willis Towers Watson Securities queried in its report.

While the ILS market is not expected to suffer severely from the recent string of catastrophes and losses, the events serve as a sort of drill for the sector, the report said, pointing out that although estimates of industry insured losses range as high as $100 billion, this is spread over several events with no one yet constituting a “$100 billion event.”

“We neither expect large-scale impairments of reinsurers nor do we expect many ILS investors to suffer massive catastrophe bond losses or asset under management (AUM) declines more broadly,” Willis Towers Watson Securities said.

However, the report added, “Even though this is not ‘that year,’ the loss activity will provide some clues as to what might happen when a $100 billion-plus event occurs.”

For example, even though the 2017 market is not expected to see such large-scale losses, “2017 may be the largest aggregate ILS payout to date,” the report said, which could influence investor behavior.

“How the various instruments perform both for ceding companies and for investors will impact the choice of ILS instruments going forward,” the report said.