Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Aon ILS Indices outperform all fixed-income benchmarks in 2015


In 2015 the Aon ILS Indices, which track the performance of investment baskets of catastrophe bonds, all outperformed a number of comparable fixed income benchmarks, as well as beating the S&P 500 Index, the latest report from Aon Securities shows.

No matter how much reinsurance rates have declined and catastrophe bond pricing has dropped an investment in ILS and cat bonds continues to outperform comparable benchmarks, often with lower volatility as well.

For large institutional investors looking to add an asset class to their portfolios, which has relatively low correlation and attractive returns over the longer-term, reinsurance-linked investments through ILS and cat bonds continue to demonstrate that they can be a valuable source of return.

In 2015 all of the Aon ILS Indices posted gains, however it is very evident just how much pricing has declined in catastrophes bonds and comparable reinsurance by tracking the indices over time.

For 2015 the Aon All Bond and BB-rated catastrophe Bond indices, which track across the market perils, posted annual returns of 3.51% and 2% respectively. Meanwhile, the peril specific U.S. Hurricane and U.S. Earthquake catastrophe Bond indices returned 5.01% and 2.85% respectively.

Aon ILS Indices returns and versus fixed income benchmarks

Aon ILS Indices returns versus fixed income benchmarks

Looking at the performance of the Aon All Bond Index, which represents a broad cross-section of the catastrophe bond market’s return, versus some of the benchmarks over a longer period two things become clear.

Aon All Bond ILS Index versus benchmarks

Aon All Bond ILS Index versus benchmarks - Source: Aon Securities and Bloomberg data

Firstly, the returns achievable in the catastrophe bond market are down significantly, that cannot be disputed. However the returns remain very attractive versus the benchmarks, outperforming all of them for three years in a row.

Secondly, the lower-volatility, over a longer term, of catastrophe bond investments is evident from the index performance over the last nine years, as we have charted above. In fact, over the nine years the Aon All Bond ILS Index has returned 70.8%, compared to 64.75% for the CMBS benchmark, 58.49% for the S&P 500, 38.01% for 3 to 5 year U.S. treasury notes and 35.68% for 3 to 5 year ABS.

Of course this is the whole attraction to ILS and catastrophe bonds. That you can look at the performance of the asset class over a longer period, a period which includes the financial crisis and the catastrophe heavy years of 2011/12, and clearly see out-performance of the benchmarks in terms of return and at lower volatility.

This is exactly why large institutional investors are increasingly finding their way into the ILS market and why catastrophe bonds remain a very attractive fixed income investment, despite the lower available returns.

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