Aon Securities, the investment banking and capital markets unit of insurance and reinsurance broker Aon plc, has recorded a new high in its annual insurance-linked securities (ILS) market report, seeing the market at $24 billion for the first time.
We have to begin with the caveat that Aon’s figures differ and are lower to those reported by Artemis in our statistics on the outstanding ILS and catastrophe bond market and our quarterly cat bond and ILS market reports, as the broker doesn’t include the private transactions we feature.
Aon Securities saw the outstanding catastrophe bond market at $24 billion ($23.5bn precisely) at the 30th of June. The broker always reports on a rolling year basis to the mid-year and this is the highest figure it has seen at this key point of the year.
The report not only highlights this new record year-end high for the cat bond market, it also comments on records seen in the last twelve months, including a record average transaction size and a record first-quarter of the year.
During the twelve month period to June 30th 2015 Aon Securities recorded $7 billion of new catastrophe bond issuance, a decrease on the prior year which saw $9.4 billion of cat bonds issued. For comparison, Artemis recorded $8.048 billion of new issuance in the same period in the Deal Directory.
While down on the prior year, which it must be remembered included the record $1.5 billion Everglades Re Ltd. (Series 2014-1) cat bond, the annual issuance figure is still the third best ever recorded, according to Aon Securities.
Paul Schultz, Chief Executive Officer of Aon Securities, explained; “The decrease in catastrophe bond issuance during the 12 months was in part due to the reaction of the traditional and collateralized reinsurance players to the heightened competition from the catastrophe bond market. This reduction was offset by a sizeable increase in collateralized reinsurance participation.”
It’s true that conditions in the broader reinsurance market made collateralized reinsurance particularly competitive and attractive, as a source of risk transfer, in the last year.
At the same time ILS fund managers have increasingly skilled-up their underwriting teams in order to write more of that business, resulting in a lot of new inflows going to collateralized reinsurance rather than cat bonds.
But the cat bond market has continued to grow, reaching this new all-time high for outstanding bonds, an impressive feat given reinsurance market conditions and demonstrating that there is still a strong appetite for cat bonds, both from the cedants and the investors in ILS.
Schultz concurred; “By June 30, 2015, catastrophe bonds on-risk had reached an all-time high, as of any June 30, of $23.5 billion, an impressive figure especially given that around $6 billion of bonds matured over the 12 months.”
Aon Securities noticed a trend towards larger transactions, as well as the emergence of diversification opportunities for ILS investors during the period under review.
Schultz highlights that “substantial progress was made in the ILS market” in the twelve months.
“During this period, sponsors continued to extend coverage on catastrophe bond transactions, bringing to market larger deal sizes, and offering investment opportunities in new territories and perils,” Schultz explained.
That resulted in a new record, on Aon’s numbers, for average transaction size, which it puts at $279m, the highest for any 12-month period ending June 30th. Another record was recorded in Q1 2015, with the quarter seeing record issuance of $1.7 billion across eight transactions.
While some new diversification opportunities have been seen, the catastrophe bond market remains largely exposed to U.S. catastrophe risks. 22 of the 25 transactions featured U.S. risk in some capacity. Outside of the U.S., solely Japanese risk was found in two transactions, and stand-alone European risk in one cat bond deal.
“In all, the catastrophe bond market has seen over $67 billion of cumulative issuance since 1996, demonstrating its importance as a strategic and efficient risk management tool for insurers and reinsurers,” Schultz commented.
He went on to explain that catastrophe bonds continue to demonstrate their importance, even in a challenging and competitive marketplace where other forms of reinsurance are keenly priced.
He said; “Even amid an environment of reduced spreads and increased competition from traditional (re)insurers that characterized the period under review, ILS continues to strengthen its position within the (re)insurance industry.”
Looking ahead, Aon Securities continues to see catastrophe bonds and ILS playing an increasingly vital role in global reinsurance and risk transfer.
Schultz predicted; “We forecast USD6bn to USD7bn in ILS issuance during calendar year 2015, and expect current pricing trends to continue into 2016 in the absence of substantial catastrophic events that disrupt the supply of capital.”
One of the reasons for this forecast that is perhaps lower than some investors may have hoped for, is the higher level of competition being presented by the traditional reinsurance market.
“The traditional market responded to the recent progress of the alternative market by providing competitive pricing and multi- year expanded coverage. As a result, some key catastrophe bond sponsors elected to turn to the traditional and/or collateralized markets,” Aon Securities report explains.
Collateralized reinsurance however is expected to continue to grow, while the market remains so competitive.
The report continues; “On the investor side, we see continued growth in allocations to collateralized reinsurance, driven by higher returns and access to broader risks. These trends are a strong sign of the role for alternative capital within the broader risk transfer market.”
Encouragingly the report notes; “The efficiencies of the capital markets to price risk have emerged as a driver of the overall market.”
The efficiency of ILS capital is a key driver for its future growth, particularly in a time when insurers and reinsurers are under pressure and need to reduce their costs of capital. Having access to efficient ILS and capital market risk transfer capacity can assist re/insurers in that goal.
The high levels of competition have resulted in sponsors being; “The beneficiaries and we expect they will continue to benefit from this competition, while investors are finding more ways to participate and develop long- term relationships.”
Artemis readers will be aware that, based on our numbers including private ILS deals we’ve included in the Deal Directory, the market has already seen over $6 billion of new issuance from 40 transactions in 2015 to date.
Aon has a good view of the pipeline of deals that will be coming in the third and fourth quarters, so the forecast for $6 billion to $7 billion suggests that we won’t see any records set this year, but we will continue to see steady issuance over the remainder of 2015.
It’s encouraging to read the healthy state of the ILS and catastrophe bond market, according to Aon Securities report, with new records reached despite the high levels of competition from traditional reinsurance.
As the market finds an equilibrium in terms of pricing, with demand still expected to keep rising, the market set to expand further into new risks and territories and investors continuing to gain an appreciation for insurance risk as an asset class, the outlook looks healthy for ILS and catastrophe bonds going forwards.