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Cat bond issuance down as market flirts with alternate ILS options


Total market issuance of nonlife 144A-type catastrophe bonds through the first nine months of 2015 is down 19.0% compared with the same period last year to $4.8 billion, possibly reflecting a shift to other types of financial instruments, according to a report from Willis Capital Markets & Advisory, the company said in a statement Tuesday.

This year’s third quarter saw $650 million of coverage issued through three catastrophe bonds, an increase over Q3 2014 when only one bond came to market, the $200 million Golden State Re II.

Two of the bonds utilize a parametric trigger: Acorn Re 2015-1 for $300 million of U.S quake cover and Bosphorus Ltd. 2015-1, with $100 million of Turkey quake cover. Ursa Re Ltd. with $250 million in California quake cover, uses an indemnity trigger.

An indemnity trigger provides coverage on a loss basis and is triggered by those losses. A parametric trigger uses measurements of some kind – wind speed, seismic activity, water levels/height – to trigger coverage/payment through the bond.

The decline in year-to-date issuance of 144A catastrophe bonds may indicate interest in other parts of the sector, said the Willis report, “Catastrophe Bond Issuance Is Down: The New Future or Just a Head Fake.”

“Does this represent a permanent shift away from Rule 144A deals towards cat bond light, collateralized re, and similar ILS products or is it just a temporary wobble? One could argue that a more permanent shift away from the most liquid ILS products has occurred,” said Willis in its report.

Increase participation and familiarity with insurance-linked securities may be leading investors to try their hand with instruments other than 144A bonds, says the report.

“The market has matured. As a result, those end investors, mostly pension funds, who have supported ILS funds for some time have become increasingly comfortable with reinsurance risk. This increased comfort has made them more willing to accept some of the purported illiquidity of collateralized re within the ILS funds they back,” said the report.

“The insurance-linked securities market is at an inflection point,” Bill Dubinsky, head of ILS at Willis Capital, said in the statement

“Despite the continued downward pressure on reinsurance rates, investor appetite remains strong and we’ve seen net new capital come into the re/insurance arena during 2015. However, the proportion of Rule 144A catastrophe bonds issued compared to other forms of ILS is down as investors have shifted towards more illiquid products, such as private cat bonds and collateralized reinsurance,” said Mr. Dubinsky.

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