Growing sophistication of ILS & cat bonds ensures positive outlook: Aon

The greater range of options available to cedants from insurance-linked securities (ILS) and catastrophe bonds, along with increased sophistication of solutions, ensures a positive outlook for the ILS market in 2015, according to Aon Benfield Securities.

In its latest catastrophe bond market report published today, Aon Benfield Securities (ABS), the capital markets and investment banking unit of global insurance and reinsurance broker Aon, explains that the increasing parity between ILS solutions and traditional reinsurance, alongside investor appetite, has helped to promote growth.

Paul Schultz, Chief Executive Officer of Aon Benfield Securities, commented; “The strong finish to 2014 resulted in new records being established in the ILS sector, and while a certain amount of sponsor interest can be attributed to the favorable spreads when compared to traditional reinsurance, the greater range of options that have become available across ILS products was also a significant driving force.”

ABS’ report highlights record annual property catastrophe bond issuance in 2014, which it records as $8 billion, which was helped by a strong $2.1 billion of issuance in Q4. This record year helped ABS’ measure of the outstanding catastrophe bond market to reach $24.3 billion as of the 31st December 2014, another record and representing 18% growth over the prior year-end.

Catastrophe bond issuance by half year - Source: Aon Benfield Securities

The report summarises the notable transactions of the year, as well as issuance statistics, trends and an interview with a market participant.

Highlights from Q4 2014’s issuance include Everest Re’s Kilimanjaro Re Ltd. (Series 2014-2) which was the largest five year cat bond ever, the largest deal yet from the California Earthquake Authority Ursa Re Ltd. (Series 2014-1), Amlin’s Tramline Re II Ltd. (Series 2014-1) cat bond which brought some higher layer risk to market, further expansion of AIG’s coverage under Tradewynd Re Ltd. (Series 2014-1) and Zenkyoren’s interesting five-year floating three-year term aggregate structure in Nakama Re Ltd. (Series 2014-2).

All of Aon Benfield’s ILS Indices posted gains for the full-year 2014. The Aon Benfield All Bond and BB-rated Bond indices posted returns of 4.39% and 2.02% respectively, while the U.S. Hurricane and U.S. Earthquake Bond Indices returned 7.37% and 3.46% respectively.

The difference in returns compared to 2013 is stark, demonstrating the lower available spreads from catastrophe bond investments. In 2013 the All Bond index returned 11.16%, BB-rated Bond index 7.6%, U.S. Hurricane 11.12% and U.S. Earthquake 6.47%. Those returns have more than halved for some indices, demonstrating the importance of a diversified portfolio and the growing interest from investors in private ILS deals which tend to have higher returns available.

For 2015, ABS forecasts another active year for catastrophe bonds and ILS, with the scheduled maturity of $5.5 billion of catastrophe bonds, of which Artemis has recorded $2.7 billion of maturities already, expected to result in many ILS sponsors renewing their ILS or cat bond covers.

New sponsors are also expected to continue to come to the cat bond market, as the low spreads and increased sophistication of the product with corresponding expansion of available coverage attracts more ceding insurers.

Continued growth of alternative reinsurance capital is also forecast, with investor appetite continuing to grow for the ILS and insurance linked asset class. While at the same time cedants are becoming increasingly comfortable with the addition of ILS and cat bonds to their own risk transfer programs.

“The increased investor appetite for ILS, coupled with the increasing sophistication of solutions, should ensure a positive outlook for the sector in 2015, and we look forward to working with our clients on new and tailored solutions that meet their risk requirements,” explained Paul Schultz.

Also read: Predictions for 2015: Paul Schultz, CEO, Aon Benfield Securities.

The full report can be downloaded from the Aon Benfield website here.

Artemis’ Q4 2014 Catastrophe Bond & ILS Market Report – A busy finish to a record year for ILS

We’ve now published our Q4 2014 catastrophe bond & ILS market report.

This report reviews the catastrophe bond and insurance-linked securities (ILS) market at the end of the fourth-quarter of 2014, looking at the new risk capital issued and the composition of the cat bond & ILS transactions completed during Q4 2014. It also includes a brief review of the full-year 2014’s record issuance.

Download your copy here.