11 April 2014 Alternative Risk Transfer

Strong ILS issuance forecast for second quarter

Strong levels of investment-linked securities (ILS) issuance are expected in the second quarter of 2014 as issuers benefit from reduced spreads, improved speed to market and more flexible terms.

A report issued by Willis Capital Markets & Advisory, part of Willis, found that strong levels of ILS issuance are expected in the second quarter, building on the strong issuance levels in the first and improved conditions.

It said that the bulk of deals in the second quarter are likely to include US hurricane exposure with some opportunistic tranches added in to satisfy investors’ ongoing desire for further diversification in their portfolios.

The first quarter of 2014 saw increasing participation from money managers and mutual funds investing directly in ILS, the report said.

Bill Dubinsky, head of ILS at WCMA, said: “Money managers, mutual funds and ILS specialist investors still see significant value for their investors despite the fall in market clearing spreads. Note that a modest tick upwards in spreads would bring in a significant amount of additional capacity. As a consequence, the risk of running out of capacity seems limited.

“There are several factors driving the uptick in deals. First, new issuance risk spreads have continued to trend downwards falling from 12.0 percent in Q3 2012 to 6.4 percent in Q1 2014. Second, terms have become more flexible to allow for deals tailored to a sponsor’s needs. This flexibility can sometimes increase risk spreads but sponsors at least have increased options. Third, speed to market is improving, reducing lead times between decisions to proceed and execution. Finally, sponsors and their brokers are getting better at resisting the siren call of overpriced private placements.”

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