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Insurance-linked securities sink in second quarter

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After a record-breaking start to the year, the insurance-linked securities market took a downturn in the second quarter, Swiss Re Ltd. said Thursday, pulling in just $800 million for the smallest second quarter since 2011.

This contrasted sharply with the first quarter of the year, Swiss Re said in its ILS market update, where new issuance hit $2.07 billion and beat the previous first-quarter record set last year by over 20%. The second quarter historically had been the largest quarter in previous years.

“ILS issuance in 2016 started the year as if it were shot out of a cannon,” the report said. “January, which is usually a fairly mundane month, saw three transactions (six classes) priced for a January record total of $800 million. However, issuance came to a screeching halt in (the second quarter) without a single transaction pricing until the second week of May.”

While total issuance for the half was lighter than those of the last few years, Swiss Re said the number of transactions was in line with recent years, reflecting a decrease in deal size. The average size of a newly issued class was down over 35% from the first half of 2015 to about $130 million.

The Swiss Re Global Cat Bond Total Return Index had an annualized return of 5.77% for the first half of 2016, the report said, up 1.56% from the annual return of 2015.

Swiss Re said that the first half of 2016’s issuance was once again dominated by U.S. wind and earthquake deals, with the two perils accounting for over a 65% share. They were complemented by other perils including Canada earthquake, Europe windstorm, Japan typhoon and extreme morbidity, the report said.

Brexit, the United Kingdom’s June 23 vote to leave the European Union, appears to have marginal ramifications for the ILS market, the report said. Until the U.K. leaves, Swiss Re said, there should be no change to the status quo, so the majority of existing ILS transactions will be unaffected.

In addition, the report said, most ILS transactions involve U.S. sponsors with U.S. trust accounts, thus Brexit will have little to no bearing.