6 March 2014 Alternative Risk Transfer

2014 ILS levels unlikely to exceed 2013

It is unlikely that activity in the insurance-linked securities (ILS) markets in 2014 will outstrip the level seen in 2013.

That is the opinion of Cory Anger, global head of ILS structuring and managing director at GC Securities, speaking ahead of the SIFMA Insurance and Risk Linked Securities conference which has been taking place in New York this week.

“The market is performing well; we’ve seen pricing decline on the first two cat bonds that we’ve been involved in,” said Anger. “With respect to the recent Queen Street IX, Munich Re did a similar deal in June but Queen Street IX that’s just completed was slightly larger and priced 15 percent tighter, which demonstrates the amount of interest from capital markets capacity in ILS, specifically within catastrophe bonds.

“However, given the softness of the market overall, I don’t see 2014 necessarily exceeding last year’s issuance because there are alternatives, so whether it’s easier to do something in the traditional market or buy collaterised reinsurance, as opposed to going through the process of a cat bond, it’s a tension between what clients are looking for and the attributes of the placement.”

However, Anger says that the market will remain consistent and she expects to see new issuers.

“We’re going to see consistent activity. People are very thoughtful about their purchases, so they don’t immediately respond to the last deal and how it’s priced, tight pricing doesn’t necessarily indicate that you’re going to see a tremendous amount of risk flood in as result of that,” she said.

“At the moment, we’re very focused on not just 144A cat bonds but private cat bond solutions too, which I think is going to be a growing part of the segment as many of our middle and small markets accounts find it challenging to reach out to capital markets capacity.”

While some investors have voiced their interest towards new risks, Anger says that this is not something which GC Securities is currently working on.

“Many of the things that I’m working on now are existing risks, but maybe in geographies that people haven’t gotten access to before,” she said. “We’re also looking at expanding out some of the new and novel risks that recently came in.

“For example the result of us doing the Metropolitan Transport Authority (MTA) transaction has highlighted on the Marsh side just how much flood and storm surge risk that clients are taking.  It’s started a thought process around solutions and seeking out what they can provide and how we can help. The introduction of capital markets capital isn’t meant to cannibalise the existing pool, but should help to grow and stabilise it.

“After an event the reinsurance capacity pool may be depleted, so for an entity that this is all they do, such as reinsurers, it is a very severe event that they’re facing. For the capital markets, it could be only half a percent of their assets under management affected. Capital markets can bring stability with regards to capacity, terms and conditions and pricing.”

As the conference gets into full swing, Anger believes that discussions around whether or not the conference should focus solely on cat bond funds will once again resurface.

“For the last two years there have been discussions over whether the conference should only be cat bond focused, but from our perspective, we see less cat bond only funds. If they start in that way, they morph over time to providing side cars or writing collateralised reinsurance, so it’s form over substance for investors.

“From our perspective we just want to embrace this capacity, but there’s a tension within the space about what is the right form of capacity and can these different forms of capital markets capacity mutually exist.”

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