ILS market continues to push boundaries

Despite $1.92 billion of new risk capital issued via 13 deals, issuance volume in the fourth quarter of 2017 declined year over year, according to the Bermuda Monetary Authority’s (BMA) latest Bermuda Insurance-Linked Securities (ILS) Market Report.

The June 2018 report focused on the fourth quarter of 2017, but stated that full year issuance in 2017 was approximately $12.6 billion, with $8.1 billion maturing. This brought the total amount of outstanding ILS coverage to approximately $31.2 billion, which was over $4.0 billion higher than the total outstanding ILS coverage at the end of 2016. According to the BMA, Bermuda remains the leading jurisdiction for the issuance of catastrophe (cat) bonds.

ILS issued from Bermuda represents 72.9 percent ($23.3 of $31.1 billion) of total outstanding capacity at the end of the last quarter of 2017. Since 2010, 198 Bermuda-based special purpose insurers (SPIs) have been registered and have issued 203 ILS deals. Bermuda is also host to foreign ILS listings on the Bermuda Stock Exchange (BSX) which augments the depth of the secondary market.

The BMA also pointed out that a total of 99 foreign ILS (comprising 168 tranches) are listed on the BSX with an aggregate nominal value of $24.2 billion. Approximately $1.4 billion (6.0 percent) of these deals were issued by vehicles domiciled in Ireland and the US. Ten new ILS deals totalling $1.5 billion were listed on the BSX during the quarter while three deals in the amount of $509.6 million matured.

In the global primary market fourth quarter issuance activity declined 9.9 percent year over year. There were 13 new bonds issued, totalling $1.9 billion compared to six deals and $2.1 billion in Q4 2016. During Q4 2017, four deals matured with a notional value of $659.6 million resulting in net issuance of $1.3 billion. Strong investor interest and sponsor appetite throughout the year helped drive the ILS market to new highs.

The BMA report said that full year issuance exceeded $12.6 billion with 62 transactions making 2017 the biggest year for issuance volume since at least 2009, when Bermuda entered the market. The average deal size for Q4 2017 transactions was lower relative to the same quarter last year. The average deal size during the quarter was $148 million, down from $354.2 million in Q4 2016.

According to the BMA, the largest deals of the quarter were issued by the California Earthquake Authority and Validus Holdings, each in the amount of $400 million. At the lower end, the smallest deal was a private placement in the amount of $10.0 million.

Indemnity triggers continued to be the most popular trigger type used in ILS deals. ILS deals with an indemnity trigger represented 58.3 percent ($18.2 billion of $31.2 billion) of total outstanding volume in the ILS market. This was followed by the industry loss index trigger type, which accounted for 28.1 percent ($8.8 billion) of the outstanding volume.

The BMA also pointed out that the ILS market remains small relative to traditional re/insurance business. The $31.2 billion of risk covered by ILS represents 5.3 percent of global reinsurer capital which is estimated to be $605.0 billion. Since 2009, 325 ILS bonds have been issued of which 203 were issued by Bermuda-domiciled SPIs.

Bermuda maintained its position as the leading jurisdiction in ILS over the past quarter, accounting for 74.8 percent ($23.3 billion of $31.2 billion) of the outstanding volume in the market. Other countries with significant insurance securitisation activity in this area include the Cayman Islands and Ireland which represent 14.2 percent ($4.4 billion) and 7.4 percent ($2.3 billion), respectively.

The majority of ILS cover North American perils which account for 62.8 percent ($19.6 billion) of total outstanding volume. Asian and multi-regional perils account for 10.4 percent ($3.2 billion) and 10.2 percent ($3.2 billion) of the market, respectively, while the remaining four categories are each less than 6.0 percent and account for the remainder.

Unknown sponsors and private deals played a larger role in terms of the number of transactions although their individual issue values were relatively low when compared to traditional insurers and reinsurers. Primary insurers sponsored 51.9 percent of total coverage for North American perils ($10.2 billion of $19.6 billion). 57.0 percent ($1.8 billion) of perils are sponsored by reinsurers. Following the increase in privately placed deals, for which information is sometimes limited, the region of coverage is unknown for 2.8 percent ($0.9 billion) of the market.

Bermuda facts

Looking at Bermuda’s primary market, the Island remains the leading jurisdiction for the issuance of ILS. Bermuda-based SPIs accounted for 79.1 percent ($1.5 billion of $1.9 billion) of issuance volume during the quarter. In the last quarter of 2017, Bermuda-based SPIs underwrote 10 ILS transactions covering natural catastrophes in North America and Asia along with unknown perils.

The average deal size for Bermuda-issued ILS in the fourth quarter of 2017 was $138.5 million. This represents an average decrease of $226.5 million per deal compared to the level in the last quarter of 2016. The fall in average size was due to a number of smaller privately placed deals—they accounted for five of the 11 deals issued out of Bermuda and their average size was $31.0 million.

The largest Bermuda-based deals issued during the quarter were also the largest ones mentioned above, being from the California Earthquake Authority and Validus holdings, each valued at $400 million. The BSX accounted for 77.6 percent of the global market capitalisation of ILS at the end of Q4 2017.

The BMA also stated that the Bermuda market is a leader in the specialisation of cat bonds, with the majority of transactions based on indemnity triggers. Since the first Bermuda ILS deal was issued in 2010, an indemnity trigger has accounted for 59.2 percent ($13.8 billion of $23.3 billion) of outstanding deal volume for transactions issued by Bermuda-based SPIs. This was followed by the industry loss index trigger type which accounts for 32.0 percent ($7.4 billion) of the outstanding volume for Bermuda-issued deals.

During the last quarter of 2017, 39.9 percent ($768.0 million) of the Bermuda-issued deal volume had an indemnity trigger while 8.2 percent ($157 million) had an unknown trigger type. North American perils by direct underwriters account for the largest share of outstanding volume for Bermuda-issued ILS. Primary insurers sponsored 43.9 percent of total coverage for those bonds ($6.6 billion of $15.1 billion) while reinsurers sponsored 30.2 percent ($4.6 billion). Primary insurers also ceded 42.4 percent ($1.1 billion) and 44.5 percent ($1.4 billion) of multi-region and Asian risks, respectively.