Insurance-linked securities market has a stellar year: Aon Benfield

by Artemis on September 6, 2012

The insurance-linked securities and catastrophe bond market has experienced a stellar year of performance, according to the latest annual ILS market report from Aon Benfield Securities. The regular annual report on ILS and cat bond market progress is titled ‘Evolving Strength 2012’ and looks at key trends in the marketplace in the year to 30th June 2012.

The Aon Benfield report is always interesting as they end their year at the 30th of June, when most other annual ILS market reports tend to come out after January. This means that Aon Benfield capture a different issuance landscape and all of the historically busy period of the fourth and first quarters around the January renewals within their report. There’s no right or wrong way to do this, but with Q4 and Q1 being so important and so typically busy and the January renewals being so key to the reinsurance market, it does make sense to include them within the same year of issuance.

In the year running to 30th June 2012, Aon Benfield Securities said that catastrophe bond issuance for the period reached $6.43 billion, which is more than $2 billion more than reported a year earlier. This is the second highest annual issuance recorded since the market began, with the highest being $8.15 billion in 2007. One of the highlights of the year was Q1 2012 which saw record issuance of $1.49 billion, beating the previous record Q1 of 2011 which saw $1.02 billion. It will be interesting to see how Q1 2013 compares with so much interest surrounding the market. The chart below shows issuance by year from the report.

Catastrophe Bond Issuance by Year (Years ending 30th June)

Catastrophe Bond Issuance by Year (Years ending 30th June) - Source: Aon Benfield Securities

Aon Benfield recorded 30 transactions closing within the year period, well up on the 24 that closed in the year before. U.S. hurricane risk continued to dominate the cat bond market with more than 50% of natural catastrophe issuance being exposed to the peril. You can view details of every transaction, and a few more privately placed deals as we have 34 listed for the year, in our catastrophe bond and ILS Deal Directory.

U.S. earthquake risks share of the cat bond market grew slightly, increasing from 17% for the year ending 30th June 2011, to 20% for the same period in 2012. We can of course attribute that growth to the California Earthquake Authority’s continuing use of the Embarcadero Re cat bond transformer. Conversely, European windstorm risk issuance dropped, from 21% to 17% in the same timeframe. That’s interesting and could be down to the fact that we haven’t seen a major European windstorm loss for a number of years now.

Life and health contributed $330m to the total issuance for the year. Life and health ILS remains a very small part of the overall market but one which both market participants and observers expect will continue to grow slowly.

At the 30th June 2012 the volume of cat bonds and ILS outstanding in the marketplace was $14.92 billion according to Aon Benfield’s report. That’s an increase of $3.4 billion from the 30th June 2011 which is extremely healthy growth and shows where a good proportion of the new capital which entered the market was put to work. The cat bond and ILS market secured more than half of the new capital entering the reinsurance space from alternative capital providers it would seem (Aon said $5 billion entered the space while Moody’s felt it was $6 billion). You can see the size of the outstanding ILS and cat bond market in the chart below.

Outstanding and Cumulative Catastrophe Bond Volume, 2002 – 2012 (Years ending 30th June)

Outstanding and Cumulative Catastrophe Bond Volume, 2002 – 2012 (Years ending 30th June) - Source: Aon Benfield Securities

Paul Schultz, Chief Executive Officer of Aon Benfield Securities, said; “In the 12 month period under review, the insurance-linked securities sector clearly demonstrated its resilience following the global financial crisis, reaching its highest levels for both new issuance and outstanding volumes in four years. This strong performance is set to continue through the second half of 2012 and beyond, as conditions are appropriate for both sponsors and investors to utilize ILS as an effective risk transfer mechanism and as an asset class that yields healthy returns when compared to benchmark securities. We consider the ILS sector to be continually evolving, becoming ever more diversified and adaptable to clients’ needs.”

Aon Benfield’s ILS indices show the healthy performance of the market over this twelve month period, posting very positive returns which demonstrate why investors are so keen on the asset class. The All Bond and BB Rated Bond Indices returned 7.4% and 7.86% respectively, compared to 2011 returns of 6.43% and 4.72%, while U.S Hurricane Bond and U.S. Earthquake Bond Indices posted returns of 7.60% and 4.38% respectively, for the period ending June 30, 2012. That positive performance will have continued past June if the evidence of other ILS and cat bond indices are anything to go by. It’s easy to see the attraction when you compare these indices to the usual benchmarks, as Aon Benfield do in the chart below.

Aon Benfield All Bond Indices versus Financial Benchmarks

Aon Benfield All Bond Indices versus Financial Benchmarks - Source: Aon Benfield Securities, Bloomberg

Overall the report paints an extremely positive picture of a very healthy catastrophe bond and insurance-linked securities market. With all the signs pointing to a continuing healthy level of issuance and increasing appetite for the asset class from investors the next twelve months will be extremely interesting.

Cumulatively the ILS and cat bond market has seen an amazing $44.035 billion of issuance since the market began back in 1996 according to the report. Paul Schultz said that this demonstrates the importance of cat bonds and ILS as a “strategic and efficient risk management tool.” We have details on almost every transaction since 1996 in our Deal Directory.

You can download the full report via Aon Benfield Securities press release. We will likely comment on some other highlights from the report over the next few days.

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