Last year was the second biggest year historically for the insurance-linked securities (ILS) market, with approximately $6.3 billion of bonds brought to market, suggests a new report from Swiss Re.
“Investors continued to flock to the largely uncorrelated and attractive risk adjusted returns offered by catastrophe bonds, while sponsors capitalized on the opportunity to cede risk at lower overall costs by employing ILS structures,” the report notes, putting 2012 behind only 2007 in terms of issuance.
There were 27 deals, producing a total of 47 tranches, completed in 2012 with an average size of $227 million per deal, outpacing 2011’s 23 deals, at an average of $190 million. Many of those 2012 bonds issued were for wind damage in the United States, the report suggests.
2012 was somewhat unique, especially with Hurricane Sandy, which shifted in nature before making landfall in New Jersey in October. “The wide range in initial loss estimates illustrates just how unclear preliminary loss estimates can be in densely populated areas when an unusual storm hits,” the report states.
“Both sponsors and investors have shown resilience through these events as new bonds have been issued, and investor demand has continued to hold strong, verifying the stability of the ILS market.”
The ILS market has grown to be a fundamental part of reinsurance and insurance companies’ risk management programs, Swiss Re notes. “Along with sponsors’ growing comfort level with regards to transferring risk through catastrophe bonds, the investor base too has grown increasingly comfortable with the product, and we are seeing more pension funds and asset managers participate in the market,” the report says.