If there were medals given for markets which bounced back from the 2017 record-breaking catastrophe losses, the ILS market would take gold. Not only did it show its maturity in the aftermath of the losses, it has come back stronger than it was before. The way the market dealt with 2017 volume and the growth in capital through renewals are also adding to the momentum
The US catastrophe market, specifically the Florida CAT Bond, and the collateralised reinsurance markets, show no signs of slowing down, observes Paul Dispenza, head of debt & escrow for Deutsche Bank Trust and Agency Services in the Americas.
He says that the volumes of ILS issuance during the first half of 2018, with $7.3 billion of deals issued, illustrate the positive sentiment in the market.1 The $3.28 billion issued in the first quarter was the largest amount for that period, while the $4 billion issued in the second quarter is the second highest on record for that period.
“Those issuance volumes illustrate a sign of resilience after the heavy losses of 2017,” he says. “Last year was unprecedented in the way this market was hit by losses and led to a lot of speculation around how the market would respond.
“People wondered if investors would reload or if trapped capital would become a challenge. In fact, investors responded very well; they have reloaded and will look to the end of 2018 and early 2019 to deploy. The market came through.”
Despite the costs of losses impacting providers, underwriters and arrangers, the abundance of capital has encouraged nimble players to come up with innovative ways to get that capital into the secondary markets, notes Dispenza.
An example of such an innovation is the launch, by electronic and voice interdealer broker Tullett Prebon, of a new issuance and trading platform for insurance-linked notes (ILNs), initially featuring catastrophe industry-loss instruments that will be fully-securitised to have the benefits of secondary liquidity. ILN’s fully-collateralised, securitised, tradable insurance or reinsurance linked notes, allow for the trading of and investing in catastrophe risk. The platform, provides companies a way to issue ILNs to secure protection, for either reinsurance or retrocession, while investors and ILS fund managers can then invest in catastrophe risks by providing the capacity to back ILN’s.
Changes impacting servicing
From a servicing standpoint, the CAT bond market continues to be impacted by rising interest rates. “As a consequence, there continues to be the alternative to Money Market Funds (MMFs) used as collateral i.e. IBRD/EBRD World Bank notes, for which the Bank can provide custody services. MMFs and deposits on balance sheet are still highly considered for collateralized reinsurance and traditional reinsurance,” Dispenza explains.
Also, servicing structures are becoming boilerplated. For example, structures like CAT bond issuances are being serviced by single trust teams in-house, while escrow and insurance trust teams handle collateralized reinsurance and deals where there are no capital market truncations, notes or bonds.
“Investors are looking at this growing area as they see it as a significant asset class in which to invest. However it’s the new cedents and existing sponsors of these catastrophe bonds that are driving the issuance growth,” explains Dispenza. “For this reason, we need to focus on regions of the U.S. market like Florida and California, etc.”
To add to the mix, Dispenza highlights a growing trend of government and quasi-government entities that are playing in the CAT bond and collateralised reinsurance market. Federal Emergency Management Agency (FEMA), is a good example of an organization that has issued these CAT bonds to cover catastrophes and passes the liability into the capital markets.
Confidence has been so robust in the aftermath of the losses that pricing has barely been affected. “Many of the biggest investors in this space continue to be pension funds and they are in this for the long haul,” says Dispenza. “It will only continue to grow.”
Where is the growth?
“The market continues to attract new issuers who want to have the ability to transfer risk in this way as part of their overall strategy. There is also a lot of talk about new risks and other innovations, including digitalisation, being introduced to the market. All this should push volumes upwards.”
The next step could be the development of structures that transfer risks such as cyber and terrorism into the capital markets.
For Deutsche Bank, the products and services it offers will evolve with the markets. “We originally serviced cat bonds, but now have a full service offering which incorporates all of the many forms of alternative capital and ILS structures seen in the market today.
“It is all about facilitating access to the market and ensuring we remain in step with the evolution of this area of risk transfer,” he concludes.
Paul Dispenza is U.S. Head of Sales for Debt and Escrow within Deutsche Bank’s Corporate Trust team.
Americas Head of Debt and Escrow, | Deutsche Bank
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