Issuance size grows, as coupon rate decrease in ILS

The size of ILS transactions entering the market continues to grow, but the coupon rate for investors has declined as institutional players continue to increase their investment in cat risk.

That is one of the conclusions drawn from BNY Mellon’s white paper report on the ILS market, entitled  The Disaster Gap, which can be viewed in our Special reports section.

Citing the 2013 Bosphorus Re deal—which provided coverage for Turkish earthquake risk--Emma Wilkes, managing director of corporate trust insurance services at BNY Mellon said, “Look at Turkey’s 2013 Bosphorus Re issuance, which was being marketed with a coupon of 3.25 percent over Libor on an issue size of $125 million. When it was issued the size had grown to $400 million and the coupon came in to a price of just 2.50 percent over Libor. The issue size is growing and the coupon is shrinking.”

The report found that “fungible capital has now overtaken bricks-and-mortar start-up insurance companies as a preferred route to market, particularly in the aftermath of catastrophe driven industry dislocations. Capital can flow quickly and easily into sidecars, cat bonds and other insurance instruments to take advantage of heightened demand post-catastrophe. But what began as an opportunistic play has evolved into a new market with expanding opportunities.”

Chris Waterman, managing director and head of EMEA insurance at Fitch Ratings, added that traditional reinsurance and hedge fund investors are now being replaced by pension funds and institutional investors entering the cat space in their hunt for diversification, lack of correlation and yield.

Their marked uptick in interest has placed downward pressure on ILS returns, as investor interest continues to outstrip supply. Nevertheless, investor interest remains buoyant.

Despite suggestions in some quarters that investor interest would be eroded by an inevitable increase in interest rates, Wilkes said that “a return to the normal interest rate environment is probably some time away. Even when this occurs, we believe allocations of institutional investors such as pension funds to ILS will continue to increase as they seek sources of diversification.”