Kane Chronicles (Comment): Capitalising on the capital markets

Liz Frederick

Capitalising on the capital markets

As 2011 ends on a high for the ILS sector, with the market momentum looking set to continue through 2012, we discuss the factors driving this with Liz Frederick

2011 for the ILS market can most definitely be described as a 'year of four quarters'. While total catastrophe issuances were down by over 10% year-on-year, the first quarter of 2011 witnessed the most active period in the sector's history, with over US$1bn issued during the quarter. While there was a sharp decline in Q2, Q3 saw a return to record-breaking issuance activity, followed by a very strong performance for the sector in Q4.

"2011 finished on an extremely positive note for the ILS sector," says Liz Frederick, Head of ILS at Kane. "There were a number of factors which contributed to this surge of activity in the second half of the year, including a rise in demand for non-US wind perils and a number of issuances being up-sized over this period."

A review of the various renewals reports issued by the broking sector shows that there is overall agreement that the signs are extremely positive for a strong start to issuance activity in 2012. As stated in the Guy Carpenter January 2012 renewals report 'Catastrophes, cold spots and capital – navigating for success in a transitioning market', there is what it describes as "a deep pipeline of transactions" in place for the first half of 2012 and beyond.

"What we have seen in the latter part of 2011 is reflective, in our opinion, of the growing maturity of the ILS sector," believes Liz.

"We are observing a greater willingness to use these collateralized vehicles to cover a broader range of perils. In addition, we are seeing a move to up-size these structures. This is clear evidence of the increasingly prominent role that such vehicles are playing alongside standard re/insurance market products."

"This growing market maturity is also clearly apparent in the increasing sophistication of the products available," she adds. "The sector is becoming ever more responsive to the needs of sponsors and can now offer a level of flexibility to cater for most market demands that we have not seen before."

The year also witnessed a number of first-time sponsors entering the market. According to Guy Carpenter, of the 14 sponsors which brought some 18 transactions to the 144A property catastrophe bond market in 2011, three were new to the sector.

"The ILS sector has clearly reached a very important stage in its evolution," says Liz. "As we enter 2012, we can expect to see the momentum which the market has generated in the latter part of 2011 continue to build. However, as transaction sizes look set to increase and the sector moves to encompass a more diverse array of perils, the breadth and depth of experience needed to manage this transitional phase becomes ever more important. At Kane, we believe it is essential that organisations ensure their ILS team includes expertise not only specific to the ILS market, but to the insurance sector as a whole. By combining these capabilities, we can enable our clients to further capitalize on the benefits afforded by accessing the capital markets."

Liz Frederick, Head of ILS
Email: liz.frederick@kane-group.com