ILS is Bubble-less

New investor entrants in insurance-linked securities (ILS) will remain with the market even as the current interest rates rise threatens to pop the sector’s funding bubble, according to a report issued by Aon Benfield Securities on Aug. 30th.

The report says that billions of new investment capital that has moved in the market over the past twelve months will continue despite declines in ILS spreads and the possibility higher yielding credit instruments becoming more attractive in the near future.

“Aon Benfield Securities believes that these investors are long term in nature and will tend to stay invested even if interest rates improve in traditional investments,” the report titled Insurance-Linked Securities Capital Revolution—ILS Market Expands to New Heights 2013 said.

Catastrophe bonds and ILS have suffered from capacity issues in the past as investors moved quickly out of the sector when fortunes turned. Following the 2008 financial crisis hedge funds liquidated many of their ILS positions to meet redemption demands leading a collapse in the sector’s growth.

However, over the past year large institutional pension funds have poured money into catastrophe bond funds and other ILS structures as depressed interest rates have kept fixed income yields low on other investment possibilities.

Between $5 billion to 6 billion in new capital has entered the market, with around $3 billion flowing into the market in the last six months, according to the report. Institutional investors participation in the sector increased from 34 percent of total catastrophe bond capacity at the end of last year to total of 41 percent today, Aon Benfield says.

With new issuance expected to outpace maturities for the remainder of the year, the report argues that investors will snap up between $7 billion to $8 billion on catastrophe bonds before Dec. 31.