August 27, 2014

Bermuda: a world leader in the insurance linked securities market

Most people’s first thoughts of Bermuda will be of a paradise island that combines turquoise waters and pink beaches with old-style British colonial charm. To sophisticated investors, however, Bermuda is known as one of the world’s premier financial jurisdictions and is home to the fastest-growing niche sector of insurance linked securities (ILS).

For decades, Bermuda has been recognised as a centre of excellence in reinsurance and insurance – indeed it is known as the world’s risk capital – but the recent growth in ILS has been remarkable.

You may not have heard of ILS, but these vehicles, which have a subset often known as catastrophe bonds or cat bonds, are offering very attractive yields. In 2013, the total return for the cat bond market was 10.9 percent (as measured by the Swiss Re Global Cat Bond Performance Total Return Index), which is one reason why institutional investors have taken a keen interest in them since the financial collapse in 2008. The potential returns are just part of the attraction for investors. These assets are considered to be largely uncorrelated with the broader financial markets and are seen as having extremely low volatility. ILS funds in general are looking at returns of 7.5 percent on average, according to the risk transfer blog Artemis, which is just below the average returns of the wider hedge fund market, which Eurekahedge reported as 8.02 percent for 2013.

And Bermuda, which is already well established as one of the top three reinsurance centres in the world, has been pushing ahead to make sure it is the jurisdiction of choice for the setting up, listing and servicing of ILS.

The evolution of ILS
In 2009, the Bermuda Monetary Authority (BMA), the island’s financial regulator, changed the laws to make setting up ILS easier. By the first quarter of 2014, Bermuda was the jurisdiction of choice for more than 60 percent of ILS issued globally.

The outstanding amount of ILS issued in Bermuda represents 49 percent of the worldwide stock of ILS. This year, the value of ILS listed on the Bermuda Stock Exchange (BSX) broke the $12bn (€8.8bn) mark for the first time.

While it is known to have beautiful beaches and great golf courses, Bermuda has also strived to be at the forefront of risk innovation since the 1950s. For more than 70 years, it has continuously shown the ability to respond to changes in market conditions to the point where investors and the wider financial markets now look to Bermuda for the next industry innovation. No asset class illustrates that better than the evolution of the ILS sector.

Last year saw a major transition for the ILS market from an obscure segment of the reinsurance sector to a real competitive force, with investors and issuers alike becoming more comfortable using vehicles such as cat bonds for securing against natural disasters.

In a nutshell, ILS are capital market vehicles that allow a company to shed a risk. The most common form of ILS is the cat bond, with which insurers manage their exposure to natural disasters by passing on potential losses to investors.

The island has been supporting the push for attracting more ILS, and the BSX has been working hard with the Bermuda Monetary Authority and the government to implement the appropriate level of regulatory and operational infrastructure. The Bermuda Business Development Agency (BDA) has also been working with the business community to support the growth in this increasingly important sector.

The BSX now has $12.43bn (€9.1bn) of cat bonds, ILS and insurance linked investment funds listings. By listing on the BSX, issuers demonstrate a stamp of quality – proving that they complied with internationally recognised standards of transparency and disclosure.

This is a new all-time high for us, and it seems not that long ago when we were amazed to reach $500m in listings in 2010. Things have progressed quickly. At the start of 2013, we were host to $5.81bn, which grew to $7.06bn in May that year, then to $8.4bn in October, and finishing the year with $9.71bn (€7.14bn).

Read the full article on the European CEO website

Source: European CEO


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