The latest annual review of the insurance-linked security and catastrophe bond markets has been published by Aon Benfield. The report ILS Review 2009 – Adapting to an Evolving Market takes a look at activities in the market this year and the latest trends within the sector. The report looks at the disruption caused by the financial market turmoil of the last year and the measures being taken to counter the downturn. The report also takes a look at the market in detail both from an issuance and investor standpoint.
They conclude that despite challenging times the market is coping admirably and has outperformed most asset-backed securities by giving positive returns to investors. Those returns though have dropped according to their proprietary Cat Bond Indices, these show that cat bonds provided a total investment return of 3.89% for the year ending June 30th compared to 10.12% the previous year. Quite a drop! European bonds are highlighted as the best performers which backs up the demand seen for any deals with European perils involved. The graph below, taken from the report, really shows the drop in returns across the different peril regions. This particularly demonstrates how much less attractive North American windstorm risks must be as an investment this year. However, it’s still an impressive track record in returns given the troubles in the capital markets, so certainly not cause for doom and gloom.
The report concludes that in order for the market to stay strong we need to see diversification of perils, geography, risk attachment levels and sponsors. We agree completely; this kind of variety is how longevity can be brought to the market and investors persuaded to bring more capital to it. While it remains biased towards U.S. hurricane risk and a small selection of issuers the market may flourish but growth will be limited. The desire is there amongst issuers to secure a diversified source of reinsurance capacity and this could help to drive issuance more briskly in the next year.