ILS market showing signs of recovery

The global insurance-linked securities (ILS) market has taken a hit because of the recent market disruptions, but it is beginning to re-emerge and adapt, according to a report by Standard & Poor’s Ratings Services.
Insurance-linked securities are instruments used to transfer insurance risk to the capital markets. Some of the more common forms of ILS are catastrophe bonds, extreme mortality bonds, industry loss warranty derivatives, sidecars and catastrophe futures contracts.
“The ILS market has faced difficulties from the collapse of Lehman, downgrades of sponsors and financial guarantee providers, and general investment losses,” says S&P’s credit analyst Maren Josefs. “The result has been forced sales and limited new issuance, leading to an overall market contraction.”
Despite the hard times for ILS, they have nevertheless demonstrated improvements in their structural features and offer better disclosure, says S&P’s. “This establishes stronger foundations from which the ILS market will develop and grow.”
Josefs says new issuance of ILS has slowed considerably due to several key factors.
“The reinsurance market softened, disruptions in credit markets deepened, and then a few days before Lehman’s collapse, Hurricane Ike made landfall in the U.S., increasing uncertainty over potential losses,” she says. “These events, together with the overall dislocation of bond prices, put a temporary halt to new issuance in the ILS market in the fourth quarter of 2008.”
All the same, 2009 has experienced a subdued recovery. “Since February this year, issuers have launched nearly (US)$1.4 billion of new catastrophe (cat) bonds,” she said. “It’s our understanding that the private market has been active as well.