Cash & Liquidity ManagementInvestment & FundingCapital MarketsILS Gains Ground as Alternative Asset Class

ILS Gains Ground as Alternative Asset Class

A further year of growth in 2014 demonstrates that the insurance-linked securities (ILS) market is increasingly accepted as an alternative asset class, reports Munich Re.

In its just-published report, entitled
‘Insurance-Linked Securities (ILS) Market Review 2014 and Outlook 2015’
, the German reinsurance giant reports that for the third year in a row, the catastrophe (cat) bond market experienced material capital inflows, increasing total notional outstanding by 21%, to US$23.2bn. Annual issuance volume amounted to US$8.4bn.

At year-end 2014, cat bond cover for US windstorm alone reached roughly the size of the total cat bond market of three years earlier.

Munich Re says that the typical cat bond issuance size increased and brought the market closer to other, more mainstream asset classes. Last year about 50% of cat bond transactions were issued in deal sizes below US$200m, but 2014 saw more than 60% of placements total US$200m or more, with a quarter reaching an issuance size of US$400m or more.

With the largest cat bond ever, Florida’s Citizens Property Insurance successfully tapped the market via its Everglades Re Series 2014-1 with an issuance size of US$1.5bn in the second quarter of 2014.

A major driver of net inflows into the cat bond market was institutional investors entering the market through specialist ILS funds. In 2014, those funds further increased their dominance in the field, and their expertise in sourcing and analyzing reinsurance risk helped drive acceptance of indemnity deals.

Prospects for 2015 are also strong. In H115 the market faces a total of US$4.95bn of maturing cat bond volume, greater than any full-year maturing volume since 2009; with 70% of that total due in Q1. “Repeat sponsors will capitalize on the resulting investors’ reinvestment demand by renewing expiring deals but first-time sponsors will also be attracted by those market conditions,” the report predicts.

Munich Re says that cat bond investors currently find that risk adjusted returns have tightened significantly over the past three years to a level of around 400 basis points (bps). The group believes that this trend could level off in 2015 due to certain minimum return requirements on the buy-side that may cause investors to reach further into the levered ILS product spectrum, including the specialist investment vehicles known as ‘sidecars’ and certain collateralised reinsurance placements.

ILS Market – Outstanding, Issued and Maturing Volume 2006-14*

Munich Re ILS Market 2006-14

Source: Munich Re

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