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Stamina remains in $6bn+ ILS market

The insurance-linked securities (ILS) market remains on course to have its strongest year since the financial crisis with total cat bond issuance of around $6bn.

Issuance volumes for the year to date were sitting at just under $4.4bn ahead of Les Rendez-Vous de Septembre, as Hannover Re marketed a renewal of its Eurus European wind bond. This is well ahead of the $2.4bn achieved by the same point in 2011 and means the market is already within close reach of $5.5bn-$7bn - the range predicted by market experts surveyed at the start of the year by sister publication Trading Risk.

However, notes of caution are being voiced about whether the sector can support continued growth in 2013, amid increasing fears that the momentum behind property cat rates may dissipate towards the major 1 January renewal.

"To the extent that hardening market conditions diminish into 2013, Fitch would expect less overall utilisation of capital market reinsurance alternatives than has been the case in 2011/12," Fitch said at the beginning of the month.

Nonetheless, the rating agency added that the broader collateralised reinsurance product - which encompasses cat bonds, sidecars and specialist unrated reinsurers - was proving itself to be an increasingly viable alternative to traditional reinsurance.

One major institutional investor told Trading Risk that if 2012 closes without major cat losses it would prompt discussions about easing back its 2013 allocation on the assumption that pricing would decline next year.

LGT's head of insurance-linked strategies, Michael Stahel, noted that institutional clients were constantly screening the financial markets for opportunities across all asset classes. "If the insurance-linked space is becoming less attractive compared to other investment opportunities, investors will move their allocation - clearly in line with the mechanics of the traditional reinsurance cycle."

But at the same time, many investors are not worried about being on the next "rocket ship" and are interested in the long-term benefits of investing, another adviser noted.

These strong capital levels in ILS will help keep it competitive compared to the stabilising traditional market, others argued.

Chi Hum, head of ILS at GC Securities, noted that new capital coming into the market is divided between two niches and is chasing deals at both ends of the risk spectrum. "The key is that the market is presenting an opportunity in terms of pricing and availability."

Moreover, others said that alternative reinsurance has established itself sufficiently that pricing catalysts are less important than they once were.

Hum said that using alternatives was no longer just a pricing decision for sponsors as they were beginning to integrate these options into their total reinsurance programme rather than using them as a plug for coverage gaps.

"It points to an underlying change in behaviour," he said. "They're starting to value the structural differences."

Stahel added that regulatory changes and concerns about counterparty credit were also creating stable demand for collateralised cover. He said he expected a very healthy pipeline of ILS issuance throughout the second half of the year, with a focus on diversifying perils. He would also like to see "sideways" US wind risk covering second or multiple event perils.

Ten cat bonds were issued in the last quarter of 2011 with a total size of $2.11bn, making up roughly 45 percent of total issuance for that year. This was just below the $2.4bn issued in Q4 2010, which was around 43 percent of total issuance.

Structuring banks are currently replying to several requests for proposals and there is a strong expectation in the market that there will be an above-average pipeline both in renewals and new issuance during Q4, sources said.

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