ILS Investor Appetite Uninhibited By Recent Losses: Swiss Re

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Includes: GLRE, HVRRF, HVRRY, SSREF, SSREY, TPRE
by: Steve Evans

Global reinsurance giant Swiss Re has noted the continued and increased appetite of insurance-linked securities (ILS) investors to allocate capital to the sector, despite recent losses and potential ongoing loss development from 2017's catastrophe events.

The Switzerland-based reinsurer's Capital Markets unit has released its H1 2018 ILS report, which explores issuance in the first half of the year following the costliest catastrophe loss year on record for global insurers and reinsurers.

According to Swiss Re, issuance in H1 2018 reached $7.3 billion from 20 transactions, which, while extremely strong, is below the $8.4 billion of issuance witnessed in the same period last year, which ended up being a record full year for catastrophe bond issuance.

It's worth noting that Swiss Re's numbers do vary somewhat from Artemis', owing to the reinsurance giant excluding privately placed deals, the issuance of a bond covering financial guarantee risks, and also three deals that covered mortgage insurance risks, as recorded by the Artemis Deal Directory.

According to Artemis' numbers, issuance in H1 2018 reached $9.39 billion from 43 transactions, while H1 2017 issuance reached $9.76 billion. So, while the numbers do vary, the fact that H1 2018 issuance is only behind H1 2017 in terms of risk capital brought to market remains true.

Commenting on the solid levels of issuance witnessed in the marketplace, during the first half of 2018, Swiss Re notes that as capital markets investors awaited loss development from 2017's catastrophe events, "appetites were uninhibited by potential losses and investors continued to allocate capital to ILS at a relatively stable price during the first half of the year."

The response of the ILS community to the large losses experienced in 2017, which for many in the space would have been their first loss experience, has been well documented across the re/insurance industry.

The fact ILS reloaded and actually expanded in time for the January renewals, and that cat bond issuance is on track to again break issuance records in 2018, highlights the permanence of the sector and both the ability and willingness of investors to pay losses when needed.

According to Swiss Re, cat bond activity in the first half of 2018 resulted in overall, notional outstanding in the cat bond market of $29.11 billion, which represents growth of 8.39% from the $26.85 billion recorded at the end of 2017.

Again, Artemis' numbers differ here. According to the Artemis Deal Directory and quarterly ILS and cat bond market reports, the outstanding cat bond market at the end of H1 2018 totalled $35.3 billion, which is growth of $4.3 billion, or roughly 14% from the $31 billion recorded at year-end 2017. So, again, while the numbers differ, the growth trend remains true.

Discussing spreads of new issuances, Swiss Re's H1 2018 ILS report notes that spreads stabilised following a short-lived widening period after the events of 2017.

The reinsurer states that the weighted average spread for cat bonds within the Swiss Re Global Cat Bond Index fell from 5.1% at year-end 2017 to 4.91% at the end of H1 2018. While the weighted average expected loss fell slightly from 2.49% at year-end 2017 to 2.47% at the end of the first-half of this year.

"While there were conversations about market prices hardening after last year's events, the first half of 2018 proved that investors continue to find the ILS space attractive," says Swiss Re.

The Artemis Deal Directory shows that issuance so far in the third quarter of 2018 is just $2 million below the level seen in Q3 2017, with a deal set to close in September expected to take the total above the $1 billion mark for the quarter.

With this in mind, and the continued appetite of investors in the space to allocate capital, despite potential loss creep and the fact the Atlantic hurricane season is ongoing, it seems likely that full-year 2018 catastrophe bond issuance will again break records and surpass that seen in 2017.

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