BMA: ILS continues to surge forward

Issuance volume in the third quarter of 2018 rose significantly year over year, according to the latest report on the insurance-linked securities (ILS) market by the Bermuda Monetary Authority (BMA).

According to the BMA report, there was $2.5 billion of new risk capital issued via nine catastrophe bond deals—$1.6 billion more than the amount issued during the same period last year.

Total issuance of $12 billion for the first three quarters of 2018 is the highest on record for this point in the year. The total nominal amount of outstanding ILS increased to $36.9 billion.

The BMA said that Bermuda remains the leading jurisdiction for the issuance of catastrophe bonds. ILS catastrophe bonds issued from Bermuda represented 74.2 percent ($27.4 of $36.9 billion) of total outstanding capacity at the end of Q3 2018. Since 2010, 210 Bermuda-based special purpose insurers (SPIs) have been registered and there have been 243 Bermuda-domiciled ILS deals issued.

It also points out that Bermuda is host to foreign ILS listings on the Bermuda Stock Exchange (BSX) which augments the depth of the secondary market. A total of 91 ILS (comprising 147 tranches) are listed on the BSX with an aggregate nominal value of $24.1 billion. Eight new ILS deals totalling $2 billion were listed on the BSX during the quarter while seven deals in the amount of $1.1 billion matured.

The BMA report said that the volume of ILS deals issued in Q3 2018 increased $1.6 billion year over year. There were nine new bonds issued, totalling $2.5 billion. Over the same period, seven deals matured with a notional value of $1.3 billion. The $1.4 billion of net issuance increased the total stock of outstanding capacity to $36.9 billion which is a 23 percent increase year over year. At quarter end, year-to-date issuance volume totalled $12 billion—the highest level on record for all years since 2009.

The average deal size for Q3 2018 transactions was higher relative to the same quarter last year. The average deal size during the quarter was $277.3 million, up from $145.6 million in Q3 2017. The largest deal during the quarter, $653.3 million, was issued by Bellemeade Re 2018-2. The deal will provide reinsurance protection to cover a portfolio of mortgage insurance policies related to 357,594 loans underwritten by Arch Capital.

Highlights and triggers

The BMA report also highlighted the $500 million FloodSmart Re 2018-1 cat bond, which was designed to transfer a portion of the US National Flood Insurance Program (NFIP) risk to capital markets. The FloodSmart Re 2018-1 cat bond was the first to provide reinsurance coverage for flood risk and the first for the NFIP.

Indemnity triggers continue to be the most popular trigger type used in ILS deals. ILS deals with an indemnity trigger represent 60 percent ($22 billion of $36.9 billion) of total outstanding volume in the ILS market. This is followed by the industry loss index trigger type which accounts for 26.1 percent ($9.6 billion) of outstanding volume.

According to the BMA the ILS market remains small relative to traditional re/insurance business. The $36.9 billion of risk covered by ILS represents 6 percent of global reinsurer capital which is estimated to be $605 billion.

Since 2009, 377 ILS bonds have been issued. Bermuda continued its position as the leading jurisdiction in ILS over the past quarter accounting for 74.2 percent ($27.4 billion of $36.9 billion) of the outstanding volume in the market. Other countries with significant insurance securitisation activity in this area include the Cayman Islands and Ireland which represent 13.47 percent ($5 billion) and 4.73 percent ($1.7 billion), respectively.

The majority of ILS covers North American perils which account for 64.6 percent ($23.8 billion) of total outstanding volume. Asian and multi-regional perils account for 10.5 percent ($3.9 billion) and 10.2 percent ($3.7 billion) of the market, respectively. Primary insurers sponsored 50.6 percent of total coverage for North American perils ($12.1 billion of $23.8 billion). In contrast, the sponsor type for 35.6 percent of the volume for Asian bonds falls under the “other” category ($1.4 billion of $3.9 billion) which includes government agencies and pooled associations/cooperatives. Multiregional perils account for 10 percent ($3.7 billion) of the market of which 53.8 percent ($2 billion) is sponsored by reinsurers.

Following the increase in privately placed deals, for which information is sometimes limited, the region of coverage is unknown for 3 percent ($1 billion) of the market.

Bermuda leads the way

The BMA stresses that Bermuda remains the leading jurisdiction for the issuance of ILS, with Bermuda-based SPIs accounting for all catastrophe bond issuances in the third quarter. Overall, Bermuda-issued ILS catastrophe bonds represent 74 percent ($27.4 billion) of total outstanding capacity at the end of Q3 2018.

The BSX accounted for 65 percent of the global market capitalisation of ILS at the end of Q3 2018. A total of 91 ILS deals (comprising 147 tranches) are listed on the BSX with an aggregate nominal value of approximately $24.1 billion, of which $1.3 billion (5 percent) are issued by vehicles domiciled in Ireland and the US. Eight deals issued during the quarter were listed on the BSX, with a notional value of $2 billion.

The BMA report said that the Bermuda market is a leader in the specialisation of cat bonds, with the majority of transactions based on indemnity triggers. Since the first Bermuda ILS deal was issued in 2010, an indemnity trigger has accounted for 63.2 percent ($16.4 billion of $26 billion) of outstanding deal volume for transactions issued by Bermuda-based SPIs. This is followed by the industry loss index trigger type which accounts for 30 percent ($7.7 billion) of the outstanding volume for Bermuda-issued deals. During the quarter 66.1 percent ($2.4 billion) of the Bermuda-issued deal volume had an indemnity trigger and 29 percent ($1 billion) were industry loss index.

North American perils by direct underwriters account for the largest share of outstanding volume for Bermuda-issued ILS. Primary insurers sponsored 42.2 percent of total coverage for those bonds ($7.3 billion of $17.3 billion) while reinsurers sponsored 33.6 percent ($5.8 billion). Primary insurers also ceded 34.5 percent ($750 million) and 61.7 percent ($2.4 billion) of multi-region and Asian risks, respectively.