Cat bond issuance to gather pace, $8bn forecast for 2017: Aon

Insurance-linked securities (ILS) and catastrophe bond issuance is expected to gather pace into 2017, as the market carries on from a positive end to 2016, and is expected to reinvest large quantities of capital from maturities, according to Aon Securities.

“Given the positive market response already witnessed in late 2016, we expect investors to reinvest available capital and continue to support large competitive alternative reinsurance transactions,” Paul Schultz, CEO of Aon Securities, the investment banking arm of insurance and reinsurance broker Aon, explained today.

Expressing a particularly positive outlook on 2017, Aon Securities believes that 2017 catastrophe bond issuance will near record levels, as investors seek to put capital back to work from maturities and sponsors seek to take advantage of this anticipated investor demand.

With a record $6.4 billion of catastrophe bonds scheduled to mature in the first-half of 2017, Aon Securities believes that the majority will find its way back into the liquid ILS asset class, to support 144A cat bond issues.

Taking into account both new and repeat sponsor issues, Aon Securities forecasts that 2017 primary catastrophe bond issuance will be around $8 billion, a healthy figure but still not sufficient to help the market to achieve outstanding growth once again.

Schultz continued; “In the context of the macroeconomic environment, we see investors finding continued value in the alternative ILS asset class given the diversification benefit, and expect continued sector growth regardless of outcomes in either interest rate or equity markets.”

By Artemis’ reckoning from our Deal Directory of catastrophe bonds, there are $8.57 billion of cat bonds that will mature in 2017, so issuance needs to exceed that amount if the market is to grow this year.

However, Aon’s figures differ (for example its 2016 issuance figure is just $5.6 billion, where as Artemis’ was $7.05 billion) due to our inclusion of private ILS deals, life, health and every cat bond like transaction we can cover.

$8 billion, while perhaps not enough for outright growth alone, when added to an expected pipeline of private cat bond deals could be enough for the total market size to increase in 2017. Given the large maturity schedule any growth would be extremely impressive, especially when you consider that the $1.5 billion Everglades Re cat bond will mature and that deal will not be fully replaced, as Florida Citizens is unlikely to require the same amount of capital market coverage.

Aon Securities explains the drop in catastrophe bond issuance in 2016 down to “a competitive landscape in the re/insurance market.”

A slower Q2 in 2016 set the tone, as; “Issuance levels for the full year were never able to recover from the lower levels in the second quarter, which historically witnesses higher issuance levels given its alignment with the start of the North America hurricane season,” Aon Securities explained.

The ILS market report released by Aon Securities today (and available to download here) explains that; “The current market environment suggests the prevalence of a competitive alternative reinsurance market and potentially strong levels of primary issuance.”

This has been witnessed at the end of the year in the lower cat bond spreads achieved by sponsors, which suggests that potential ceding insurance and reinsurance companies could benefit from looking to the capital markets in 2017 and this attractive market environment could stimulate some new sponsors to look to ILS.

$8 billion of catastrophe bonds would be welcomed by investors in 2017, but not as much as $10 billion or more, as unless issuance exceeds all maturities investor demand will continue to outweigh supply.