Aon Benfield Securities has published its latest report looking into the last quarter of activity in the insurance-linked securities and catastrophe bond market. The Q4 2010 report looks at the key trends of the past quarter and provides some good insight into issues which affect the market (such as risk model changes and the Dodd Frank Act). It also provides a review of the Aon Benfield ILS Indices and an outlook for the market during 2011.
Aon Benfield Securities say that they expect 2011 catastrophe bond issuance to be in the region of $5 to $6 billion. They expect continuing strong interest from investors which will help the market expand. With $4 billion of cat bonds due to mature during 2011 this means the market could see a year of absolute growth which will be positive for investors. Because of these maturities Aon say they expect both repeat and new sponsors to bring transactions to market during 2011.
The report also mentions the increasing price competitiveness of cat bonds when compare to reinsurance and they ‘expect a trend towards more top layer or aggregate layer and low expected loss transactions as minimum pricing declines’.
For the full year of 2010 the Aon Benfield ILS Indices All Bond Index posted a 10.9% total return. Their other indices, the Aon Benfield BB rated Bond and Aon Benfield U.S. Hurricane Bond Indices experienced similar gains at 10.6% and 10.2%. Their Aon Benfield U.S. Earthquake Bond Index gained 7.7% for the year due to the lower coupon of U.S. earthquake risk cat bonds.
The report concludes with an interview with Ms. Insa Adena of Allianz Re which provides some insight into the Blue Fin Ltd. Series 3 transaction from May 2010 which Aon Benfield Securities helped to arrange.
You can download a copy of the full report (in PDF format) here. The press release announcing the report follows below.
Catastrophe bond issuance surges in Q4 2010; strong outlook for 2011 according to Aon Benfield Securities study
Chicago, 1/14/2011 – Aon Benfield Securities, the investment banking and capital advisory subsidiary of Aon Corporation (NYSE:AON), today releases its latest Insurance Linked Securities (ILS) report, which examines the key trends in the ILS sector during the fourth quarter of 2010.
The ILS Fourth Quarter Update highlights the strong performance of property catastrophe bonds during the period, when 10 bonds of total value USD2.0bn were brought to market, compared to the USD1.6bn of transactions seen in Q4 2009.
While the first half of 2010 was characterized by the issuance of bonds covering U.S. Hurricane risk, Q4 gave rise to a more diverse range of securities that also provided sponsors with protection against European Windstorm and Japanese Earthquake perils.
The report reveals that European Windstorm catastrophe bonds were well supported during the year, with six transactions totaling EUR525m coming to market.
In 2010, 23 property catastrophe bond transactions with a notional issuance volume of USD 4.8bn were structured, surpassing the 18 transactions of 2009 worth USD3.4bn.
Paul Schultz, President of Aon Benfield Securities, said: “The fourth quarter of 2010 put finishing touches on a year that witnessed a resurgence in ILS, and we expect this trend to continue into 2011. As the broader reinsurance markets continue to experience price softening, ILS products will remain highly competitive this year, offering sponsors a multi-year, fully collateralized, fixed price risk transfer option that has its own dedicated and experienced investor community.”
Aon Benfield Securities forecasts strong investor interest for ILS products in 2011, with several dedicated ILS funds having already stated their increased commitment to the sector.
Meanwhile, the ILS Fourth Quarter Update highlights that the Dodd-Frank Act of July 2010 has brought additional compliance procedures to the catastrophe bond ratings process. However, the Act is not expected to impair future ILS market growth.