Bosphorus 1 Re may prove game-changer for ILS

The minimum benchmark yield for diversifying perils in ILS may have reached a new milestone following Bosphorus 1 Re, with pricing on the bond bottoming out at 2.5 percent.

That is the view of Luca Albertini, CEO of Leadenhall Capital Partners, who described the deal as a “massive issuance”. He said the bond had the potential to change assumptions regarding the accepted minimum return on ILS. Previously, capital market interest would tail off significantly below 3 percent, said Albertini. The Bosphorus deal appears to have proved that lower return expectations are possible in today’s troubled investment environment and may yet encourage the structuring of further diversifying deals with a similarly low return profile.

While Albertini said that Leadenhall would not be among those investors pursuing deals below 3 percent, rising levels of capital market interest in the space is evidently helping to drive down the price of such transactions for issuers.

“Prior to the Bosphorus deal, the major impediments to diversification in ILS were a lack of modelled data and the minimum pricing requirement. Bosphorus appears to have changed the latter assumption,” said Albertini. “If diversifying perils can be placed at 2.5—perils that you would not normally dream of touching because the reinsurance is so cheap—significant levels of diversifying issuance could become available to the capital markets”.

Albertini said that this news needs to filter through to the origination teams, but that the market can expect a potential rise in diversifying perils coming to market from September. “The new pricing environment may yet stimulate new ideas and new bonds coming to market”, said Albertini. “The Bosphorus deal has the potential to unlock diversifying bonds from previously untapped markets”.

This is great news for the growth of ILS and its continuing diversification away from its traditional US focus, but will undoubtedly present a challenge to traditional reinsurance. If the dip below 3 percent returns on ILS can be sustained remains to be seen—much will depend on the continued appetite of the capital markets to pursue diversifying ILS investments—but risk pools and insurers in non-peak zones may well begin to consider more closely the potential of ILS in an increasingly attractive pricing environment for issuers.