Record level of non-life ILS issuance in second quarter, says Willis

Non-life insurance-linked securities (ILS) issuance has reached record levels, with $6.3bn in the second quarter 2017, according to the latest ILS market update from Willis Towers Watson Securities. The previous quarterly record was $4.5bn, issued in the second quarter of 2014. After a better than average issuance volume in the first quarter, the second quarter of 2017 saw $6.3bn of non-life catastrophe bond capacity issued through 36 tranches, compared with $1.0bn issued through 17 tranches in the second quarter of 2016. The second quarter of this year included two of the largest ever catastrophe bond transactions – Kilimanjaro II Re 2017-1 and Ursa Re 2017-1. Willis notes that ILS assets under management also continued to grow. The Willis report states that the ILS market “is reaching a positive tipping point as it manages a larger share of the world’s peak cat risk and plenty of opportunities remain for new issuance in non-peak cat and more generally across the property, casualty, life and health spectrum”. The growth came despite stiff headwinds from all directions, the report notes. “First, there was an ever softer market causing various analysts to assert that many traditional reinsurers now fail to cover their costs of capital. Second, government yields in Europe and Japan remained negative, depressing yields on collateral. Finally, Brexit and potential US tax changes have increased investment uncertainty.” Bill Dubinsky, head of ILS at Willis Towers Watson Securities, commented: “The market has possibly never been in such robust health, with recordbreaking issuance and competition continuing to increase among ILS fund managers. I believe this will create the conditions for significant innovation and development so that the benefits of the ILS product extend beyond peak property cat, where it may already be the preferred choice, and out across the wider insurance industry.” Looking ahead, the report states: “After the typically slow Q3, the civil war among investors will return as brokers and cedants bring 1/1s to the market. Our expectation is that Q4 volume will be muted relative to Q2 but by no means quiet. ILS activity remains high; 2017 will be a record year and 2018 may bring more of the same.” Despite the record growth, the report stresses that ILS still has a long way to go both to make a difference in property catastrophe (cat) in the middle market in peak zones as well as to have substantial impact in non-peak zones. “Further, areas beyond property cat see some limited influence from ILS, but by no means is ILS in the driver’s seat. Even in property cat it is possible that certain types of cat events will create differentiation among underwriters – traditional, ILS and otherwise – potentially shifting the balance. Still, it seems perhaps more likely that this does represent a critical juncture. “We very well may look back and see Q2 2017 as the death knell of the traditional property cat reinsurance model. As we have suggested as recently as last quarter, many reinsurers have and will successfully partner with ILS capital as well as technology to benefit their customers and shareholders, now that standing still seems fruitless,” adds the report.

Record level of non-life ILS issuance in second quarter, says Willis

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