ILS still proving popular

Despite concerns over the effects that heavy catastrophe activity in the first quarter of 2011 could have on insurance-linked securities, the market remains in robust health.

“The underlying rational and the economic logic for ILS remain very convincing and the outlook for cat bonds even after Japan is promising. Demand for cat bonds has remained strong,” says Martin Bisping, head of non-life ILS, Swiss Re.

“Assuming that the deal activity for 2011 remains similar to 2010, we expect a return to absolute market growth. In the longer term, while predictions about what the market will look like in the future are difficult to make, we are quite optimistic about market prospects.”

The Bermudan Stock Exchange has also recently announced that it had reached a record $1.814 billion in listings of insurance-linked securities. This followed the listing of the first Irish-domiciled ILS structure, Queen Street II Capital Limited.

“The BSX now has listed 17 ILS,” said Greg Wojciechowski, chief executive officer of the Bermudan Stock Exchange. “We are now heading towards the $2 billion mark—no small feat considering that the legislation that allowed the creation of these vehicles in Bermuda was only passed in October 2009.

“Our goal throughout last year and this year has been to ensure that Bermuda is in the front of mind for the creation, listing and potentially secondary market trading of ILS, and we will continue the effort.”

Investor interest in catastrophe bonds also remains high according to a recent report by Willis Capital Markets & Advisory, the boutique investment banking arm of Willis Group Holdings, the global insurance broker.

The report noted that strong investor demand resulted in a record issuance of $1 billion catastrophe bonds in the first quarter of 2011 in comparison with $650 million in the same quarter last year. It also noted that this increase included “significant recent loss activity in the traditional reinsurance market that has created an opportunity for cat bond investors”.

Whilst the market remains strong in general, recent events have demonstrated the risks investors face. Baldwin and Lyon’s ILS fund, which is regarded as a good measurement of the market’s overall health, lost 4.37 percent in March in the wake of the Japan earthquake—however, it has grown by 25.52 percent overall since its creation.

While this loss demonstrated the potential pitfalls investors can face, the fund’s overall performance demonstrated the kind of benefits insurance-linked securities can offer investors.

“Investors realise securities can default if a major catastrophe occurs, but they also need to recognise the potential for mark-to-market losses, even when there is no danger of default,” says Ed Torres, president of Baldwin & Lyons Capital Markets. “After this event, investors are, and should be, opportunistic. They are in ‘wait and see’ mode. If rates go up significantly, there is ample capital on the side lines. If rates do not rise, I suspect the market size will stay flat.”