Insurance-linked securities shine, report Aon Benfield Securities

Aon Benfield Securities have released a report which provides an annual review of the insurance-linked securities and catastrophe bond market. The report ‘Insurance-Linked Securities – Market Momentum 2010’ offers expert analysis on what Aon call an ‘increasingly important asset class’ and provides an excellent reference for anyone involved in or interested in the market.

The report shows that despite challenging times in the capital markets, insurance-linked securities and cat bonds have continued to provide value to both sponsors and investors. Aon notes that it has continued to demonstrate its importance as a source of risk transfer and has grown and evolved, responding to the challenges in financial markets well.

Despite all the uncertainty in global financial markets the ILS asset class has shown strong growth and returns are significantly up on last year. 20 new transactions were issued in the year to 20th June 2010 compared with 11 the year before. Volume of those transactions was $4.6b compared with $1.7b the previous year demonstrating the return of issuer confidence.

According to the Aon Benfield ILS Indices (which we covered last week here) ILS and catastrophe bonds provided a total investment return of 12.85% for the year ending 30th June 2010. The year before that figure was just 2.94%. That’s a big difference and it’s no surprise investors have been so interested in ILS as an asset class this year, it’s hard to think where else they could secure a near 13% return on their investment in the current financial climate. Aon attributes these results primarily to ‘mark-to-market gains across all perils’.

Paul Schultz, President of Aon Benfield Securities, said: “Over the past year, the insurance-linked securities market has once again demonstrated its importance as a source of risk transfer capacity.  The market has grown and evolved in response to a changing global economic environment, maintaining its relevance to both sponsors and investors.   Our analysis elaborates on these market characteristics and offers a positive outlook for the future.”

The report mentions such issues as the glut of U.S. wind risk which is making it difficult for investors looking to diversify their portfolio to deploy capital. Given the returns on offer there must be many investors waiting in the wings for just such an opportunity so the next cat bond to feature non-U.S. wind risks will no doubt be extremely popular.

Aon Benfield Securities foresee continued momentum in the ILS market which they say will lead to a greater number of transactions and larger transactions. They expect catastrophe bond issuance to quickly get back to the peak levels of issuance seen in 2007. Good news for anyone involved in this market.

You can download the full report ion PDF format here.