First quarter sees ILS investor base broaden: Willis

The first quarter of 2014 saw increasing participation from money managers and mutual funds investing directly in insurance-linked securities (ILS) and the second quarter looks to be on course for strong levels of issuance, notes Willis Capital Markets & Advisory (WCMA), part of Willis Group Holdings plc, which was issued Tuesday.

In 2014 Q1, there was $1.2 billion of non-life catastrophe bond capacity issued in six deals compared to $1.6 billion (includes certain transactions marketed in Q1 and closed at the beginning of Q2) marketed in five deals during Q1 2013, Willis Group Holdings, the global risk advisor, insurance and reinsurance brokers, notes in a statement. The second quarter “is on course for strong levels of issuance, with the deal pipeline developing on the back of the successful executions in the first quarter.”

The statement notes that, as is typical of any second quarter, the bulk of the deals are likely to include United States hurricane exposure “with some opportunistic tranches thrown in to satisfy investors’ ongoing craving for further diversification in their portfolios.”

A “modest tick upwards in spreads would bring in a significant amount of additional capacity. As a consequence, the risk of running out of capacity seems limited,” Bill Dubinsky, head of ILS for WCMA, says in the statement.

There are several factors driving the uptick in deals, Dubinsky notes, including the following:

• new issuance risk spreads have continued to trend downwards, falling from 12.0% in 2012 Q3 to 6.4% in 2014 Q1;
• terms have become more flexible (sometimes increasing risk spreads) to allow for deals tailored to a sponsor’s needs;
• speed to market is improving, reducing lead times between decisions to proceed and execution; and
• sponsors and their brokers are getting better at resisting the siren call of overpriced private placements.

Characterizing 2014 Q1 as “a quarter of discovery and wonder,” the report notes the “consensus is that disciplined picking will return to the market long before the wind season is upon us. This buy-and-hold market had little to offer in such a sparse issuance season, and consequently the imbalance of demand, cash inflows from new money and maturing bonds pushed up secondary pricing on very little volume. As rates fell below 3% on many issues, some investors chose to lighten up, reducing their portfolios.”

Going forward, report authors point out “investors will be on the hunt for higher-yielding bonds, which will help maintain return targets. With so little in the secondary market, there is increased longing for private placements by the investors, simply put, a quest for risk access and better yields.”