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The first half of 2019 saw $3.2 billion of new issuance in the insurance linked securities market, less than half the $7.3 billion issued in the first half of 2018, according to a mid-year report issued by Swiss Re Ltd.
Previous years’ losses blunted the market on both the trapped capital, meaning funds in bonds affected by claims, and investor sentiment fronts, Swiss Re said in the report issued on Monday.
“The lower volume can be partly explained by the lower level of liquidity due to prior catastrophe events,” Swiss Re said, adding “After the elevated catastrophe losses of 2017 and 2018, investors became more selective in 2019 with their approach of capital to ILS transactions.”
The previous losses from hurricanes Harvey, Irma and Maria 2017 and the “loss creep associated with past events” hit the ILS new-issue market as capital was trapped and potential fresh capital remained on the sidelines, Swiss Re said.
Further losses in 2018 and 2019 trapped additional capital, leaving less to redeploy into the market, and the adverse loss development associated with Hurricane Irma and Typhoon Jebi exacerbated the issue, increasing both notional impairments and trapped collateral, according to the reinsurer.
“End investors did not rush back into the market like in 2018,” Swiss Re said.
“Investors have become more selective in supporting sponsors and focused on their key strategic partners as they evaluate new structural features, aggregate triggers and hard-to-model perils. To facilitate smaller transaction size, some sponsors chose to pursue innovative solutions like utilizing Singapore as a domicile for their transaction,” Swiss Re said in a statement issued with the report.
Despite the drop in new issuance, Swiss Re said it remains “optimistic on the market‘s prospects as all asset classes go through cycles. We believe the ILS market is no different.”
The outstanding market for catastrophe bonds and related insurance-linked securities has grown 7% to surpass $40 billion in August, Artemis reports. The growth was largely driven by mortgage ILS.