The insurance-linked securities (ILS) market enjoyed a "banner year" in 2012, and even Superstorm Sandy "could not shake investors' demand for new bonds," according to a Swiss Re Capital Markets report.
The year saw $6.3 billion worth of bonds brought to the market, the second-largest historical year of issuance, behind only 2007. "Investors continued to flock to the largely uncorrelated and attractive risk-adjusted returns offered by catastrophes bonds, while sponsors capitalized on the opportunity to cede risk at lower overall costs by employing ILS structures," the report says.
Swiss Re says catastrophe events in the year tested the market, but even after Sandy, successful placements occurred, and the report adds that both sponsors and investors are growing more comfortable with the product. "The market has developed beyond a niche product for insurers, and has grown into a fundamental part of (re)insurance companies' risk-management programs," says Swiss Re.
The report says the year saw new issuances by previous sponsors such as Aetna, Allianz, Assurant, the California Earthquake Authority, Travelers, USAA, Zenkyoren, and Zurich Insurance Group. Additionally, new sponsors entered the market, such as Country Mutual, Florida Citizens, Louisiana Citizens and North Carolina Farm bureau.
Swiss Re notes some shifting around in the ILS investor base when comparing 2007 to 2012. Pension funds were not part of the investor pie in 2007, but made up 14 percent of investors in 2012. Reinsurer investment decreased over that time from 13 percent to 1 percent. Dedicated hedge funds remain the largest buyers, with their share increasing from 56 percent of investments in 2007 to 61 percent in 2012.
Noting the impact of Sandy on the ILS marketplace, Swiss Re says investors and sponsors have shown resilience despite the uncertainty in ultimate losses from the events. New bonds have been issued, says the report, and investor demand has held strong.
But the report notes, "The secondary market experienced volatility in certain potentially affected bonds immediately following Sandy, as uncertainty remained high. Certain bonds hold significant Northeast exposure and many investors were uncertain whether these bonds were likely to be triggered, causing a drop in marks on a few bonds."
Swiss Re adds that the bonds were marked back above par once preliminary estimates put losses "safely below the bonds' trigger levels," but says only time will tell wither Sandy will cause losses in the broader catastrophe-bond market.
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