SunTrust Banks, Inc. works with a diverse mix of corporations, governments, financial sponsors and institutional investors.
It means that it has a 360 degree perspective on trends in the insurance linked securities space.
Cat bond issuance volumes fell back in 2016, despite investors showing a willingness to take on riskier deals and new perils appearing on the market.
The volume of new cat bonds issued last year reached $6.8bn, down from $7.5bn in 2015 and $8.9bn in 2014, according to data compiled by Reactions’ sister publication, Trading Risk.
Parri Spector, Managing Director, Head of Insurance M&A at SunTrust Robinson Humphrey (STRH), remains cautiously optimistic about the prospects for this year, however.
“I expect cat bond issuance in 2017 will be in the $7-$8bn range,” he says. “I think there will be more discretely larger deals as a result of the consolidation we are seeing in the insurance and reinsurance sector.”
The market was boosted in December last year by the launch of two Galilei Re deals from XL Catlin, which together secured $1.28bn of cover, with one of the transactions closing in 2017.
Investor appetite for the asset class could also be piqued by economic uncertainty feeding into market sentiment, Spector says.
“We could be in for more volatile capital market conditions. In the context of cat bonds specifically, and their limited correlation to other markets and indices, such conditions would mean that ILS demand will stay robust. It could mean that issuance even grows in 2017 compared to last year, when it was down a little.”
Donny Tong, senior vice president for institutional sales at SunTrust Bank agrees with Spector, but he doesn’t think it will be a record year for ILS.
“There are some other external factors to consider. It’s a very soft rating environment in traditional reinsurance right now and premiums are low. Plus, a lot of buyers are aware that rated paper has a little more flexibility compared with cat bonds,” Tong says. “So the low price of that rated paper, coupled with its inherent flexibility, will act as a brake on any sharp growth in ILS.”
But much can happen to change the ILS supply and demand picture – either in terms of the frequency and severity of landfalling windstorms or conditions in the financial sector, particularly with a new administration in place in the White House.
Spector says that it will be interesting to see what happens between now and the important mid-year reinsurance renewal dates in the US, in respect of ILS issuance activity.
It’s likely that most investors will want to replace the upcoming maturities as they roll off, which will establish an issuance floor, Spector predicts.
“ILS really has become accepted as an asset class in its own right, making it a consistent and stable form of risk transfer for sponsors.
“Also, I expect that larger and more diverse sponsors will bring the sort of multi-peril, multi-geography deals to market that investors find attractive,” he adds.
As well as US named storm and earthquake, the Galilei Re transactions cover Canadian earthquake, European windstorm, Australian wind and Australian earthquake.
Donny Tong agrees that M&A activity could stimulate ILS issuance volumes. “The consolidation that’s happened so far and the prospect of more M&A in the pipeline as big players try to strengthen their competitive positioning creates the right conditions for larger, more diversified ILS programmes coming to market,” he says.
Diversifying non-property cat perils are increasingly attractive. “Obviously, there have been a number of transactions on the life portfolio side, to do with mortality and also longevity risk,” Spector says.
“But almost any sufficiently homogenous insurance portfolio (including those not covered by the traditional markets) is a potential opportunity for ILS structures.”
In the recent past, AIG offered mortgage default risk, Italian insurer Generali securitised motor liability risk and Credit Suisse bank transferred a portfolio of its operational risks to the capital markets.
Tong adds that the US healthcare sector will also likely see further deals, similar to Aetna’s Vitality Re series of health insurance medical benefit ratio cat bond deals. The eighth transaction in the series saw Aetna complete a $200m, quota share health reinsurance agreement.
The greatest uncertainty for participants on both sides of any ILS transaction right now is how moves by the Trump administration could affect ILS market conditions.
Spector believes that the administration’s view of offshore transactions, versus onshore, in respect of both traditional programmes and ILS is a big source of uncertainty.
“But there’s the bigger question of what the new administration might mean for the interest rate environment and global capital market conditions overall,” he adds. “But it’s still too soon to tell with any degree of accuracy.”
For additional information, please contact Parri at Parri.Spector@SunTrust.com or Donny at Donny.Tong@SunTrust.com
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