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The 144A ILS market has proved its durability this year
The last 12 months have shown that ILS investors are sophisticated and durable: Schroders Capital ILS.
The 144A insurance-linked securities (ILS) markets have proved their durability in the past 12 months and remain of great interest to investors for many reasons, which will stand the sector in good stead, Stephen Rouff, global head of Schroders Capital ILS, told Monte Carlo Today.
Rouff said to understand where ILS is now, it is important to appreciate the nuances of how the market has responded in the past 12 months. In the aftermath of Hurricane Ian, which would have triggered some bonds had early estimates on the event’s losses been accurate, the market re-priced. Spreads moved to record highs.
Due to this, the issuance pipeline in Q4 last year was “choppy”. Liquidity was constrained and some larger deals struggled to be placed. 144A deals represent some 40 percent of what is considered the wider ILS world, now estimated to be worth around $100 billion.
Yet within three months, things changed again. Investors returned, Rouff says, and spreads tightened again, although not to pre-Q4 levels. That move resulted in the sector seeing very robust issuance in the first half of the year, setting a number of records in the process.
But a divergence was emerging in investor sentiment, Rouff said. A clear preference was emerging for bonds that used index-based triggers, typically based on wider market loss indices, as opposed to ultimate net loss (UNL) triggers based on an issuer’s specific portfolio.
“A divergence was emerging in investor sentiment”
Stephen Rouff, Schroders Capital ILS
The latter means there is no basis risk for the issue, as losses are directly aligned to their balance sheet. But it means more uncertainty for the investors. “Spreads tightened more on deals using index triggers,” Ruoff said. He notes that a number of big reinsurers issued cat bonds in H1—and they all used this type of trigger.
Overall, he believes, investor sentiment is very positive to 144A ILS deals now. “They are clean, there are no grey areas, there are no issues with things such as trapped capital,” he said, referring to problems experienced in some private ILS deals. He notes that 144A deals typically cap any loss development at 10 percent.
“Their long-term performance is impressive. They show lower volatility than investment grade or high yield bonds, they are uncorrelated to the wider financial markets and offer very attractive yields,” he said. “Buyers increasingly appreciate the diversification in capital they offer.
“Investors are very interested now, issuers increasingly see their value. It is a very orderly market but one in which all the dynamics are positive,” he concluded.
Images, from top: Shutterstock / Ivan Kurmyshov