Aon forecasts substantial issuance of catastrophe bonds in the second half of 2011

Aon Benfield are the latest reinsurance broker to publish a review of the recent 1st July renewals period. The report titled ‘Reinsurance Market Outlook – June & July 2011 Reinsurance Renewals Update‘ looks at the renewals period and assesses where reinsurance rate and premium increases were observed around the world as their clients renewed their programs.

Aon Benfield report that while there were meaningful rate increases in catastrophe hit areas such as Japan and New Zealand, much of the rest of their renewals experience leads them to believe that rates will remain relatively flat over the rest of the year unless further major insured loss events occur. In fact Aon Benfield say that on accounts where they act as sole broker they achieved flat to -5% rates for their clients but on accounts where they are a co-broker rates tended to increase.

As ever, of most interest to us and our readers are their comments on capital markets risk transfer instruments such as catastrophe bonds and insurance-linked securities. They note that the capital markets continue to provide a source of alternative risk transfer to the traditional reinsurance market.

The report notes the slowdown in cat bond issuance, with just five deals completing during Q2 2011 compared to nice during the same period of 2010. Those five cat bonds amounted to $742m in issuance versus $2.3 billion during Q2 2010. They draw attention to USAA’s successful issuance of the $250m multi-peril Residential Reinsurance 2011 which they say completed with spreads that were in line with 2010 pricing demonstrating the consistency in year-on-year pricing that ILS can offer.

Aon Benfield also note the fact that the market of outstanding catastrophe bonds has shrunk due to the slowdown in issuance caused by events this year (Japanese earthquake, uncertainty over new risk models) with the total amount of outstanding cat bonds at 30th June 2011 being $11.5 billion. Last year, at the 30th June 2010, the total amount of outstanding cat bonds stood at $13.2 billion.

Encouragingly though, Aon Benfield close their commentary on the ILS market by saying that their investment banking subsidiary, Aon Benfield Securities, forecasts substantial issuance of catastrophe bonds in the second half of this year. They base this forecast on the interest they see from potential sponsors’ in discussing potential transactions for the fourth quarter. That’s an encouraging statement from a company who have been involved in many cat bond transactions in recent years and is inline with the sentiment we see from our conversations with other market participants.

Of course, the most encouraging thing for the market, particularly for investors wanting to increase their position in cat bonds, would be to see sufficient issuance later this year to enable the market to have grown again by year-end.

Here’s a copy of a great graph from the report which shows the volume of outstanding catastrophe bonds by quarter since Q4 2008.

Outstanding Catastrophe Bond Volume By Quarter - Source: Aon Benfield Securities