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London, Singapore deals signal ILS strength


Recent catastrophe bonds issued out of London and Singapore demonstrate the two domiciles’ potential for growth even as the insurance-linked securities sector takes stock after the heavy catastrophe losses of 2017 and 2018, industry experts say.

Insurance Australia Group Ltd. secured AU$75 million ($53.5 million) of annual aggregate catastrophe protection for three years with its Orchard ILS Pte. Ltd.

And Pool Reinsurance Co. Ltd., Britain’s terrorism risk reinsurer, secured £75 million ($99.1 million) in coverage with a three-year catastrophe bond through special-purpose vehicle Baltic PCC Ltd.

There are more potential bond transactions for both London and Singapore, said Cory Anger, New York-based global head of ILS origination and structuring at GC Securities, a division of MMC Securities LLC.

“Over time, we will see more transactions come out of both domiciles, and we’re certainly aware of clients that are contemplating issuing out of both,” said Paul Schultz, Chicago-based CEO of Aon Securities.

“Aon Securities is very supportive of new domiciles to the extent that clients that operate in those domiciles or even time zones to some degree,” find additional comfort in trading locally, Mr. Schulz said, adding the company is supportive of even more domiciles “if that makes sense for the market.”

The nascent market will likely take some time to develop, according to Ian Stewart, Clyde & Co LLP partner in Singapore.

“Despite developments in London and Singapore, it is still very much early days for both of these ILS markets,” he said in an email answer to questions.

“At this point, the new rules offered by London and Singapore are not pushing new issuance, but the framework of both regulations are adding folks looking to utilize ILS,” Ms. Anger said. “Singapore’s grant reimbursement scheme for upfront expenses is a key draw of the jurisdiction and expect that to help new sponsors consider utilizing ILS.”

London’s new insurance-linked securities regulations and Singapore’s 2018 grant program to support upfront issuance costs are both recent additions to the market, Mr. Stewart said.

“In the U.K., there were just a handful of ILS issued in the first year since the new rules came into force,” he said. “We expect the pace to accelerate.” 

“Meanwhile, we have just seen the first cat bond issued from Singapore,” he continued, adding, “It is generally accepted the development of an ILS platform and the establishment of a functioning ILS market will not occur overnight — it takes time as the necessary regulatory framework is established and refined and gradually the expertise necessary to provide services to potential sponsors is put in place.”

“However, the appetite for ILS is undeniable, and both these markets are moving in the right direction. Both are positioning themselves as genuine contenders to compete with those jurisdictions that lead the way in ILS offerings at present,” Mr. Stewart said.

At the same time, sources were generally bullish on the market’s future, even as some momentum may have come off as players take stock after substantial catastrophe losses in 2017 and 2018.

“Following 2017 events, we saw on a net basis positive cash coming into the marketplace,” Mr. Schulz said. “Following 2018, it feels a bit more neutral. Net, net, it feels a bit more flat to us.” 

“Sentiment on the overall market is bullish despite losses,” said Bill Dubinsky, New York-based head of ILS at Willis Towers Watson Securities. “End investors are still producing net inflows to ILS for both life and nonlife,” but with “relatively more churn,” he added.

“The majority of other end investors are still keen to grow but perhaps a little more skeptical of promises of rate increases in 2019 when they didn’t materialize to the same extent as they were led to believe in 2018,” he said.

“ILS capital is here to stay,” Mr. Stewart said. “The bump caused by hurricanes Harvey, Irma and Maria was not, as predicted by many, the end of the road for ILS. Although a lot of ILS money got tied up on renewals, there were no issues finding new capital to come in.” 

The market did see losses but mainly avoided surprises, building confidence, sources said.

“The losses that the ILS market in all segments — cat bonds, collateralized re and sidecars — has assumed have generally been within the realm of expectation for the type of events,” Ms. Anger said.

“While investors would prefer that losses didn’t occur, how the 2017/2018 losses occurred have resulted in fewer surprises, which validates investors’ expectations for when losses occur.”

“I don’t think we’ve seen a mindset change,” Mr. Schulz said.