Canadian Underwriter

“Entire new sponsors” will enter insurance linked securities market: Swiss Re

August 5, 2016   by Canadian Underwriter

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The total value of outstanding insurance-linked securities issuance dropped from $24 billion to $22.3 billion between Jan. 1 and June 30, Swiss Re Capital Markets Corp. said in a report released Thursday, observing that issuance “came to a screeching halt” after April 30. All figures are in United States dollars.

In its Insurance Linked Securities market update, Swiss Re Capital Markets predicted that “entire new sponsors” will enter the ILS market.

There were more maturities than issuances in the first half of 2016, with $4.35 billion expiring and only $2.07 billion in issuances during the first six months. Of the $2.07 billion in issuances (including extreme morbidity) in the first half, only $800 million were issued during the three months ending June 30.

There are $1.38 billion worth of ILS issuances set to expire during second half of 2016 – including four Residential Re 2012 series issuances with a total value of $400 million. Most of the securities expiring between July 1 and Dec. 31 cover U.S. risks.

“We believe that the current market conditions, largely influenced by lack of issuance in 2Q and the large maturities which weren’t renewed, will lead existing sponsors to replenish and top up their programs, and will lead entire new sponsors to enter the market,” Swiss Re Capital Markets said in the report.

Among the deals recently settled, two were issued by Blue Halo Re and settled June 16. Both cover U.S. wind storm and earthquake. One was worth $130 million and the other was worth $55 million.

Two first-time issuers to the ILS market settled deals in Q2, Swiss Re Capital Markets said in the report. First Coast Re issued $75 million in securities covering Florida wind storm and severe thunderstorm. The blog site reported earlier that First Coast Re’s issuance was on behalf of Florida property insurer Security First Insurance Company.

The other first-time issuer was Laetere Re Ltd. Swiss Re Capital Markets – which structured and placed the Laetere Re deal – announced July 7 that Laetere Re’s catastrophe bonds were placed on behalf of three subsidiaries of United Insurance Holdings Corp. There were three separate issuances with a total value of $100 million. The bonds cover certain named storms and earthquake in the U.S.

Also in Q2, Residential Re settled May 11 three ILS issuances with a combined value of $250 million. Those cover several risks, including U.S. wind storm, severe thunderstorm, winter storm, wildfire, meteor impact and volcanic eruption, among others.

Meanwhile, on May 20, Queen Street XII Re settled $190 million in securities covering U.S. and European wind storm.

“ILS issuance in 2016 started the year as if it were shot out of a cannon,” Swiss Re Capital Markets said in its ILS market update Aug. 4, 2016, adding there were three transactions totalling $800 million in January.

“Issuance came to a screeching halt in Q2 without a single transaction pricing until the second week of May.”

Related: Repeat of 1811-12 series of central US earthquakes could cost industry US$150 billion: Swiss Re

Among the issuances settled in the first quarter was a US$300 million issuance by Merna Re Ltd. covering New Madrid Earthquake.  Aon Benfield Securities reported earlier that Merna Re’s cat bonds are issued on behalf of State Farm.

The community of New Madrid, Mo. – about 200 kilometres south of St. Louis – is where four large earthquakes were felt between Dec. 16, 1811 and Feb. 7, 1812.

In a report issued in July, 2015, Swiss Reinsurance Company – using its own models – estimated what insured losses would be if the same earthquakes were to occur. The report was titled Four Earthquakes in 54 Days. The first two New Madrid earthquakes occurred about four hours apart Dec. 16, 1811. In its 2015 report, Swiss Re calculated insured losses from the main shock and aftershock Dec. 16, 1811 would be $33 billion if it happened today. As “isolated events,” insured losses from the earthquakes Jan. 23 and Feb. 7, 1812 would be $23 billion and $39 billion respectively.

“People were awakened by the shaking in New York City, Washington, D.C., and Charleston, South Carolina,” the U.S. Geological Survey stated of the New Madrid earthquakes two centuries ago, adding that chimneys were knocked down as far away as Cincinnati. USGS said the earthquakes were estimated to have been greater than 7 on the Richter scale.

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