ILS Intelligence
ILS STILL PROVING POPULAR
D
espite concerns over the effects that heavy catastrophe activity in the first quarter of
2011 could have on insurance-linked securities, the market remains in robust health.
“The underlying rational and the economic logic
for ILS remain very convincing and the outlook for cat bonds even after Japan is promising. Demand for cat bonds has remained strong,” says Martin Bisping, head of non-life ILS, Swiss Re.
“Assuming that the deal activity for 2011
remains similar to 2010, we expect a return to absolute market growth. In the longer term, while predictions about what the market will look like in the future are difficult to make, we are quite optimistic about market prospects.”
The Bermudan Stock Exchange has also
recently announced that it had reached a record $1.814 billion in listings of insurance-linked securities. This followed the listing of the first Irish-domiciled ILS structure, Queen Street II Capital Limited.
“The BSX now has listed 17 ILS,” said Greg
Wojciechowski, chief executive officer of the Bermudan Stock Exchange. “We are now heading towards the $2 billion mark—no small feat considering that the legislation that allowed the creation of these vehicles in Bermuda was only passed in October 2009.
“Our goal throughout last year and this year
has been to ensure that Bermuda is in the front of mind for the creation, listing and potentially secondary market trading of ILS, and we will continue the effort.”
Investor interest in catastrophe bonds also
remains high according to a recent report by Willis Capital Markets & Advisory, the boutique investment banking arm of Willis Group Holdings, the global insurance broker.
The report noted that strong investor
demand resulted in a record issuance of $1 billion catastrophe bonds in the first quarter of 2011 in comparison with $650 million in the same quarter last year. It also noted that this increase included “significant recent loss activity in the traditional reinsurance market
that has created an opportunity for cat bond investors”.
Whilst the market remains strong in general,
recent events have demonstrated the risks investors face. Baldwin and Lyon’s ILS fund, which is regarded as a good measurement of the market’s overall health, lost 4.37 percent in March in the wake of the Japan earthquake— however, it has grown by 25.52 percent overall since its creation.
While this loss demonstrated the potential
pitfalls investors can face, the fund’s overall performance demonstrated the kind of benefits insurance-linked securities can offer investors.
“Investors realise securities can default if a major catastrophe occurs, but they also need to recognise the potential for mark-to-market losses, even when there is no danger of default,” says Ed Torres, president of Baldwin & Lyons Capital Markets. “After this event, investors are, and should be, opportunistic. They are in ‘wait and see’ mode. If rates go up significantly, there is ample capital on the side lines. If rates do not rise, I suspect the market size will stay flat.”
AS A LEADING PROVIDER OF COLLATERAL TRUST SERVICES FOR THE INSURANCE- LINKED SECURITIES MARKET, YOUR WELLS FARGO ILS TRUST TEAM IS PROUD TO SPONSOR ILS INTELLIGENCE.
O
ver the past 10 years, the Wells Fargo ILS and Reinsurance Trust group has established billions of dollars of trusts used to
collateralise ILS, reinsurance and captive programmes worldwide. The cost savings realised by our clients using the WF Trust in lieu of letters of credit (LOCs) is staggering.
There are many benefits to using the WF Trust in lieu of LOCs to
collateralise such programmes. They include: • Saving between 80 and 98 percent of LOC fees • Keeping corporate credit lines available • Retention of the interest income of assets held in trust • Retention of ownership of the assets in trust • Ease of set-up and renewal
The trust concept is simple. Rather than posting a letter of
credit as collateral, our clients deposit cash or cash equivalents (the same cash that they would likely use to collateralise an LOC) into
a legal trust account where the depositor ‘owns’ the money and the transformer (for ILS deals) or cedant (for reinsurance) is the beneficiary of the trust. From a regulatory and carrier perspective, this satisfies the collateral requirement.
The Wells Fargo ILS and Reinsurance Trust team has the well-
deserved reputation as the most knowledgeable and responsive trust group in the industry. So if you are posting LOCs for ILS, reinsurance or captive programmes, or if you are finding your current trustee less than ideal, consider using the ILS or Reinsurance Trust, and please consider Wells Fargo as trustee.
For more information, please contact Robert Quinn on: Tel: +1 203-293-4394 Email:
robert.g.quinn@wellsfargo.com Website:
www.wellsfargo.com/insurancetrust
38 | INTELLIGENT INSURER | Summer 2011
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