Industry will see “further penetration” of insurance-linked securities capital: Willis

An increase in the use of insurance-linked securities (ILS) will “create substantial winners and losers” in the industry, Willis Capital Markets & Advisory suggested in a report released Thursday, adding that “strong investor demand” in catastrophe bonds resulted in an increase, by $100 million, of an issuance in May on behalf of The Travelers Indemnity Company.

WCMA, a subsidiary of commercial brokerage Willis Group Holdings plc that underwrites issuances of ILS, released Thursday its Insurance ILS Market Update.

Willis noted there were nine issuances, in non-life, totalling $2.653 billion in the second quarter of 2015. All figures are in United States dollars. A recent Aon Securities Inc. report, which included a life issuance, pegged cat bond issuance at $2.962 billion in Q2. Willis’s database excludes private ILS deals worth less than $100 million.

Willis says its “outlook is that regardless of whether we see a few more or slightly less cat bonds and sidecars” during the last six months of this year, and that “the industry will see further penetration of ILS capital to the insurance business – and not just for nat cat.”

This penetration “will in turn create substantial winners and losers (with some in each category being surprises) and begin to dramatically upset well settled market practices ultimately for the benefit of policyholders through the increased availability and affordability of insurance,” added WCMA. “This is change that will impact the larger world and not just a handful of industry insiders whose fortunes rise and fall from the cyclical rhythm of the insurance and reinsurance marketplaces.”

Willis listed catastrophe bond issuances made during Q2, including one made by Long Point Re III Ltd., on behalf of Travelers, covering tropical cyclone, earthquake, severe thunderstorm and winter storm.

“This $300 million per occurrence bond features an indemnity trigger with an initial attachment of $2.0 billion,” Willis said in the report. “The bond was upsized from an initial size of $200 million due to strong investor demand.”

Willis also cited three issuances, by Citrus Re Ltd., on behalf of Heritage Property & Casualty Insurance Company.

This is the third time Heritage has accessed cat bond capacity, Willis stated in the report. Those bonds give Heritage “fully collateralized protection for personal residential and commercial policies against Florida hurricanes for a three-year term,” WCMA added. “The transaction features an indemnity trigger on a per occurrence basis.”

Executives with ceded reinsurance providers “should not focus on using ILS to buy the same reinsurance program as in the past more cheaply,” stated Bill Dubinsky, managing director and head of ILS for WCMA, in a press release. “Insurers instead should be looking to restructure their reinsurance programs to better integrate ILS capacity and make more dramatic performance and efficiency gains, ultimately to the benefit of shareholders and policyholders.”