Liquidity of ILS valued by investors

Although cat bond issuance has remained steady and consistent in recent years with no dramatic year-on-year growth, the liquidity offered by insurance-linked securities (ILS) is seen as very important by some investors looking to manage a balanced portfolio.

This was one of the observations shared at Munich Re’s ILS roundtable at the Monte Carlo Rendez-Vous.

“From my perspective as a trader facilitating trades for buyers and sellers, the securitised form—as in cat bonds—are the most liquid products,” said Steve Emmerson, the head of ILS at Tullet Prebon.

He also suggested that collateralised reinsurance and sidecar issuance are both definitely on the increase.

“The liquidity aspect of cat bonds is very important. Obviously you don’t have the liquidity with the traditional form of reinsurance; with the collateralised reinsurance form, you have it to varying degrees depending on the instrument.”

Michael Stahel, partner at LGT ILS Partners, also described the benefits of ILS and noted that this form of risk transfer should model very well in solvency capital requirements.

However, he suggested that his company is somewhat indifferent as to whether it invests in ILS or collateralised re.

“We, speaking as the market, still need cat bonds. We like cat bonds, and we need them,” Stahel said.

“The issue we are facing is that we run funds, we allocate them to reinsurance and we need some liquidity within these funds.”

According to Cory Anger, global head of ILS structuring, Guy Carpenter Securities, the use of alternative capital has reached an all-time high. But she added that growth in the market has slowed in some sectors this year.

“I would say within 2016 we have been seeing more stagnation, and not just in Rule 144A cat bonds,” Anger said.

“I have seen slower growth in collateralised reinsurance, in private cat bonds and quota shares through sidecars, which have previously represented a disproportionate amount of growth for the industry.”

But, she added, the reinsurance community is still embracing alternative capital as a form of retrocession.

Juan Beer, the global head of group reinsurance at Zurich Insurance Group, suggested the traditional markets are more efficient and more effective in terms of pricing at this point in time.

“This doesn’t mean we’ll never go back to alternative capital—we just have to look at the efficiencies”, Beer said.