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Cat bond market swells to record $29bn

Catastrophe risk: many ILS issuances provide coverage for natural perils such as Florida windstorms

The catastrophe bond market has swollen to an all-time high of $29 billion, as growth in the insurance-linked securities sector continues at record-breaking pace.

Issuance for the year through June 1 was $8.15 billion — by far the highest figure recorded for this time of year in the market’s history, according to leading alternative capital risk transfer observer, Artemis.bm.

Bermuda is the epicentre of the ILS boom, with a market share of nearly 74 per cent of the world’s outstanding ILS capacity at the end of the first quarter, according to the Bermuda ILS Market Report, published this week by financial regulator the Bermuda Monetary Authority.

A slew of new cat bond deals worth nearly $1 billion in the last few days of May catapulted the market to its record level.

These transactions include a $400 million Alamo Re 2017 from the Texas Windstorm Insurance Association, a $200 million Sanders Re cat bond from Allstate, a $190 million Riverfront Re cat bond from first-time sponsor Great American Insurance Group and a $100 million Casablanca Re cat bond from Avatar Property and Casualty Insurance Company, a first-time sponsor, Artemis reported.

The momentum continued into the first day of June, with almost $100 million more in BSX listing announcements from the BSX.

One listing of $53.3 million was from Eclipse Re, the private collateralised reinsurance note platform of Bermudian-based Horseshoe Group and Rewire Securities. And another $45 million of notes issued by Fibonacci Re, a special purpose insurer established by Bermudian reinsurer Renaissance Re, were also listed on the exchange.

The ILS boom represents the convergence of the capital markets and the traditional reinsurance industry. And since Bermuda changed its regulatory framework in 2010 to allow for special purpose insurers to serve as vehicles for ILS, the island has become the undisputed world cat bond leader.

The industry has created work for law firms, alternative capital arms set up by reinsurance companies and ILS funds, among others. And the industry has raised the international profile of the BSX. According to the BMA report, ILS with a combined nominal value of $21 billion were listed on the island’s exchange at the end of the first quarter, or 77 per cent of global market capitalisation of ILS.

Bermuda’s dominance was reinforced in the first quarter, when almost 93 per cent — $2.6 billion of $2.8 billion — of new issuance was underwritten by Bermudian SPIs, the BMA reported.

However, alternative capital has taken market share from traditional reinsurers, especially in the property-catastrophe reinsurance in which Bermuda specialises, and as an inlet for extra capital into an already well-capitalised marketplace, the growth of ILS is seen as a contributing factor in suppressed reinsurance rates.

The Artemis website reported yesterday: “With around $8.7 billion of cat bond issuance now in sight for the first-half of 2017, the magic $10 billion seems eminently achievable by year-end.

“With only just over $1.3 billion of cat bonds set to mature in the second-half of the year, thoughts must now turn towards the outstanding market seeing a record $30 billion in size by year-end. That would be a real signal of a market that is still achieving steady and sustainable growth.”