Bermuda Stock Exchange
ILS funds in general are looking at returns of 7.5 percent on average, which is just below the average returns of the wider hedge fund market, which Eurekahedge reported as 8.02 percent for 2013.
Bermuda has created an environment which makes it easy to establish and maintain these vehicles. The Island has used the traditional capabilities and expertise developed from being one of the world’s biggest reinsurance hubs, to support and develop the growth of the ILS market.
Changes to the regulatory and operational infrastructure have paid off, and as a result, the outstanding amount of ILS issued in Bermuda represents 49 percent of the global stock of ILS, according to the BMA’s figures.
This is a huge achievement for us, as it was not long ago that we were thrilled to reach $500 million in listings in 2010. Since then the BSX has continued to thrive, with the exchange enjoying a record-breaking year in 2013, growing the value of the ILS securitisations listed by 67 percent.
The birth of cat bonds
To put the history of ILS into context, the market was developed in the 1990s after Hurricane Andrew devastated the US, causing more than $26 billion in damage and draining the reinsurance industry’s claims coffers. Cat bonds were created to allow reinsurers to raise funds for pay-outs for the world’s most expensive risks—primarily storms and earthquakes in countries with insurance exposure, such as the US and Japan.
They do this by selling cat bonds to investors, who receive an income, but forfeit their original investment if a natural disaster occurs.
(SPIs)—which are used to set up ILS such as cat bonds—that have been established in Bermuda.
Aon Benfield listed 19 cat bond transactions as closing in the first half of 2014, and 14 SPIs registered with the BMA in the same period.
The BSX has seen a similar interest in the listing of ILS and cat bonds. At the start of 2013, our listings of ILS stood at $5.81 billion, increasing to $7.06 billion in May 2013, then rising to $8.4 billion in October and finishing the year at $9.713 billion. Now the exchange has $13.46 billion listed ILS vehicles.
In fact, the BSX now plays host to almost half of the outstanding market for catastrophe bonds, and we are confident that this trend of incorporating and listing ILS on the BSX will continue.
Compelling yields in a low-interest rate environment, investment diversification and low correlation with the broader capital markets have fuelled investor interest.
In the current market, investors are searching high and low for assets that not only provide a decent yield, but also diversify their portfolio. To them, cat bonds and other ILS vehicles seem very attractive, and as a result, investors globally have put up to $50 billion in allocated capital, according to a recent report from Willis Re, which could reach $100 billion in the next few years, according to an estimate from Barclays Capital.
The risks covered by ILS have so far been mostly limited to US wind and earthquake, but investors have been looking at new issuance and a new variety of perils are being added that will continue to diversify this portfolio. European windstorm, Japan earthquake, Japan typhoon and Texas hurricane have all been included in the second quarter of the year.
Through ILS, Bermuda has illustrated that it can innovate, create and support evolving insurance solutions. It also shows the confidence of our diverse client base on the Island and its expertise.
Bermuda is focused on replicating these kinds of success stories on the Island in other sectors and is committed to remaining an attractive
35 Bermuda Finance | 2014
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