Aon Benfield ILS Indices show strong gains in Q2

Aon Benfield have today published their report on the insurance-linked securities and catastrophe bond market for the 2nd quarter of 2011. The report, titled ILS Second Quarter Update 2011, looks back at issuance during the last quarter and contains a number of interesting topics which we’ll endeavour to cover for you where relevant and where not already discussed through other market reports.

One of the items covered in the report is the performance of the Aon Benfield ILS Indices, a set of indices calculated by Thomson Reuters using month-end price data from Aon Benfield Securities and broken down into indices of All Bond, BB-rated Bond, U.S. Hurricane Bond and U.S. Earthquake Bond.

Interestingly, all of these indices showed better performance for the quarter than they did for the 2nd quarter of 2010 a year earlier. All posted increases apart from the U.S. Hurricane Bonds index which was almost flat which was still quite a big improvement on Q2 2010.

Overall, and the All Bonds index is a good representation for the entire outstanding cat bond market, the returns for Q2 2011 are well up on the previous year. The All Bond index returned 0.42% in Q2 2010 while this year it returned  three times as much at 1.26%. The BB-rated Bond index returned 0.41% in Q2 2010 while this year it returned 1.49%. The U.S. Hurricane Bond index was down for the quarter last year by 0.80% while this year it was down by just 0.09%. Finally the U.S. Earthquake Bond index was up 1.73% for the quarter last year and this year it gained by 2.20%.

So, despite the impact of market forces such as the earthquake in Japan, major losses across other regions such as Australia, New Zealand and the U.S. and the uncertainty caused by changes to the RMS U.S. hurricane risk model, the catastrophe bond returns have actually been better in Q2 this year than during 2010.

Aon Benfield explain that price increases across cat bonds covering non-U.S. perils have driven this performance. The desire to acquire diversifying perils from investors has helped to buoy prices further and there has also been strong price recover from Japan earthquake exposed catastrophe bonds.

The indices have not fully recovered their losses from the declines seen after the Japan earthquake though and other global catastrophe losses. For the year to date all indices are up, but most by less than half the gains seen during the first half of last year. The exception is the U.S. Earthquake Bond index which is actually up by slightly more than it was at the half-way point of the year during 2010.

Aon Benfield say that if there are no significant catastrophe events they expect to see strong seasonal price increases in U.S. Hurricane bonds as the Atlantic hurricane season progresses. They also expect strong demand to continue to increase prices for diversifying perils. However they do note that low spreads could make price increases less dramatic.