After a gentle third quarter of insurance-linked security (ILS) activity, the market picked up in December. Could 2011 be, as many people have been suggesting, the year when ILS and the world of risk securitisation goes mainstream?
With spreads falling dramatically in Europe, and new lows being touched in the US, ILS are beginning to represent a near-perfect alternative to reinsurance; coupled with strong investor demand, the signs are promising for the asset class.
What’s interesting about the past couple of months is the range and diversity of the products coming to the market. US health insurer’s Aetna issued a bond covering medical benefit claims, for instance; Swiss Re hit the market with a longevity risk vehicle.
ILS deals - December 2010 Transaction
Size ($m) Vega Capital
US, Europe, Japan cat
106.5 Green Fields Capital
100 Successor X Class III-R3
US, Europe, Japan cat
n/a Successor X Class III-S3 Kortis Capital
n/a Lodestone Re - Class A-1
Aon Benfield, Swiss Re
250 Lodestone Re - Class A-2 Vitality Re - Class 1
Medical benefit claims
125 Vitality Re - Class 2
75 Atlas Capital VI
Europe, Japan cat
60 Residential Re 2010 - Class 1
GS, Aon Benfield
US, Europe cat
210 Residential Re 2010 - Class 2
50 Residential Re 2010 - Class 3
In a report about the ILS market published on December 14, Swiss Re said 2010 will be the third best year in terms of deal volume at an estimated $4.8bn. Increased investor demand pushed pricing down around 40% since August 2009; interestingly, year-to-date issue levels of $3.8bn do not include another seven transactions currently being marketed.
According to Swiss Re, outstanding notional ILS volume could hit $14bn by year-end 2010 helped by a diversification away from US wind issuance into new risks such as European and Japanese perils as well as life bonds. Since 2007, 25 new investors have entered the space.
Secondary market spreads, says Swiss Re, have tightened overall throughout 2010: over the past 12 months, spreads have declined down 6.5% for US Wind bonds and down 50% for European Wind.
Much of the growth around the ILS market could be put down to the growing formalisation of the market around the Perils index launched last year.
The index has fomented more transparency and benchmarking: on December 15, the Zurich-based firm behind Perils said that that total placements of insurance risk transactions based on the index to date in 2010 had exceeded $1bn.
During the period January 1 to December 15 2010, a total of $1.05bn of Perils-based capacity was placed in the capital and reinsurance markets. Of this, $620m was in the form of ILS, while $430m was in the form of private or derivative transactions such as Industry Loss Warranties (ILW).
In London, meanwhile, in a further indication of the growing interest surrounding longevity risk securitisation, the London-based Life & Longevity Markets Association (LLMA) announced that Aviva joined the association as a full member.
Aviva is the LLMA's eleventh member, and joins the likes of Axa, Deutsche Bank, JP Morgan, Legal & General, Morgan Stanley, RBS, Swiss Re and UBS.
Clearly, at least from an outsider’s point of view, interest in risk securitization is growing, and growing fast. It’s also interesting to see that the common name throughout much of this activity is Swiss Re – a firm which also happens to be a founding member of Perils.