US perils dominate ILS market

In a report released earlier this week, Munich Re summarized a busy third quarter for the ILS market, which saw a number of noteworthy transactions and trends. The report documented only two instances of non-US perils being brought to the ILS market between July and September, a strong departure from 2011 and 2012.

Munich Re pegged the total issuance of cat bonds in Q3 at a value of $1.45 billion, which more than made up for the $346m in maturities. Outstanding capacity within the cat bond market now sits at $17.9 billion, a record size that surpasses the already high totals of the previous two years.

This follows an unusual third quarter, at least in terms of cat bond issuance, in which US perils made up the bulk of transactions. Traditionally, according to Munich Re, summer has been reserved for non-US perils, but 2013 proved an anomaly. However, as the report notes, abnormally high market interest so far in 2013 has led to a carryover of cat bond issuances that in other years would have been concentrated within the second quarter.

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The Munich Re update also arrives just as French insurer Axa has finalized the issuance of €350m in cat bonds, the most ever in that denomination. Low rates of return in traditional markets have been a boon for insurers looking to dilute risk, while reinsurance companies face a continually diminishing share of business in the face of a strong ILS market.

The Q3 review shows attractive conditions for sponsors, as investors continued to funnel into the ILS space. The result was lower pricing on many Q3 transactions relative to initial targets.

Munich Re also noted a growing trend of state-owned players acting as sponsors, where primary insurers have traditionally dominated. Here, says Munich Re, reinsurance companies have a valuable role to play by structuring and helping facilitate such transactions. It sees state entities forming an ever-larger portion of the sponsor group in the coming years.

Looking forward to the end of 2013, Munich Re is projecting a record-setting year in terms of non-life issuance, which would total $7 billion and outdo the previous high of $6.8m set in 2007. This would come about with the help of a fairly busy fourth quarter as sponsors prepare ahead of $2.7 billion in bonds reaching maturity over the next six months.

Posted: Monday, October 21st, 2013