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13 September 2014 Alternative Risk Transfer

Back to work

Seasonally August is a slow month in ILS sector, with few transactions coming to market, and this August has been no exception.

However, as the industry arrives in Monte Carlo for the annual Rendez-Vous de Septembre (RVS), the market’s activity is starting to hot up again.

“August is typically a slow month, and 2014 was no exception, but moving forward the market is now really focused on getting back to new deals and we’ve seen good capital inflows to support new primary issuance.

“Now the focus is post Monte Carlo and examining what is in the pipeline—what perils and types of transactions do we need to consider? The attitude is much more ‘back to work’ than was the case three or four weeks ago,” says Schultz.

He explains that this lull in the market is a result of being between typical renewals seasons, but says that ILS is gradually becoming a year-round issuance cycle.

“The quiet August is just the way that the market has developed, as there’s always a rush by sponsors to bring US hurricane transactions to market by July 1. Once that’s happened, it typically becomes quiet throughout the summer before preparing for the new wave of issuances,” explains Schultz.

“The sector is developing into a year-round issuance market, but it’s still a little quieter in the summer. Last year we saw five or six deals in the summer, which was unusual, but that didn’t repeat this year.”

As investors and sponsors revive their ‘back to work’ attitude, Schultz expects to see a busy second half of the year.

“There’s going to be a good level of offering of cat bonds and sidecars, which combined will represent a good level of activity in the second half of the year,” he says.

From strength to strength

The ILS sector has demonstrated a number of significant developments in recent months which support claims by those in the market that the alternative capital is here to stay.

Fund managers, among others, have shown a keen interest in enhancing their knowledge of the sector, with Fermat Capital recently incorporating the use of AIR Worldwide’s Touchstone catastrophe model to enable it to perform more detailed modelling on its catastrophe-related financial instruments.

“If you look at the activities of underwriters in the space five years ago compared to now, it’s much more sophisticated. As funds become larger, there’s a greater capital base in which to spread some of this cost. We’re going to see a continued push by managers to differentiate their products in the marketplace, and one way to do this is through analytics.

“Also, as we start to experience loss events, you will begin to see differentiated results in terms of performance. When there are no losses in the market, it’s hard to distinguish performance, so managers are focusing on analytics and new strategies to differentiate their results,” says Schultz.

The introduction of new ILS jurisdictions is another example of the growing success of the market.

“Having alternatives to Bermuda or Cayman-based vehicles for European sponsors is helpful for the market. It increases competition and allows sponsors to transact in domiciles that are more familiar and customary. Taking steps at the margin to ease frictional costs is also helpful,” explains Schultz.

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