Catastrophe bond issuance at a six year high: Aon Benfield

The latest insurance-linked securities market report from Aon Benfield Securities, the capital markets, catastrophe bond and ILS focused arm of reinsurance broker Aon Benfield, shows that the volume of issuance of new catastrophe bond deals in the first-half of 2013 was the highest seen for six years.

The report from Aon Benfield Securities, Insurance-Linked Securities Second Quarter 2013 Update, counts 13 new catastrophe bond deals as closing during the second-quarter, bringing around $3.3 billion of new risk capital to the ILS market. This compares to the 15 new cat bonds included in our Deal Directory during Q2 2013, amounting to $3.35 billion, as Aon does not include two smaller, privately placed cat bond deals in its figures.

The report puts first-half 2013 cat bond issuance at just under $4 billion, which is the highest level of issuance since 2007. Again this is slightly lower than our Deal Directory, due to private deals, which counts $4.08 billion of issuance. At the 30th June Aon counted the outstanding cat bond market as being $17.5 billion, a number which has already been surpassed with new transactions closing in July taking the outstanding market to nearer $18.3 billion at this time (including Northshore Re which closes soon).

Catastrophe bond issuance by quarter - Source: Aon Benfield Securities

The chart above shows cat bond market issuance by quarter and as you can see the second-quarter of 2013 has seen the highest issuance of any quarter in the last few years.

A broad array of perils was on offer to investors during the second-quarter, including regional earthquake and hurricane risks, Turkey earthquake, Australia cyclone and U.S. nationwide multi-peril. Aon Benfield Securities said that unprecedented demand for catastrophe bonds continued through he second quarter, with investor capital keeping pace with the level of primary issuance. Many deals were upsized as investor oversubscription also allowed deals to close at pricing levels at the bottom end, or even below, pricing guidance.

Pricing during the quarter continued to decline, but stabilised towards the end of Q2 at a level where cat bond pricing was roughly 40% lower than at the end of 2012. Despite this, investors continued to find cat bond risk attractive, supporting transactions sponsors and helping them to upsize issuances. Collateralized reinsurance coverage from the ILS markets continued to offer more aggressive pricing than the traditional reinsurance market.

The report notes that the reductions in ILS pricing began to have an effect on traditional reinsurance markets, enabling sponsors to benefit from the competition between reinsurers and cat bond coverage with more favourable terms and multi-year covers. Over 75% of the cat bond limit placed in Q2 was exposed to U.S. hurricanes, despite the hurricane season beginning in June, and transactions continued to come to market into Q3 containing U.S. wind risk.

The second-quarter also saw a new low point for cat bond pricing, with Merna Re IV and Bosphorus 1 Re both pricing at 2.5%, the absolute lowest spread seen in five years. No deals came to market with a coupon in the double digits which Aon said is helping to build demand for anything with a higher spread and demand for the lower yielding bonds now beginning to decrease. This will be a function of investment managers attempting to maintain their return targets without dilution.

Paul Schultz, Chief Executive Officer of Aon Benfield Securities, commented; “While we usually observe catastrophe bond issuance declining towards the beginning of the U.S. hurricane season in June, this year the number of bonds being brought to market during the end of the second quarter remained high, in part due to the attractiveness of ILS pricing. In addition to these favorable pricing conditions, sponsors secured capacity for longer risk periods and, in some cases, with broader indemnity coverage. Looking ahead, the pipeline for new issuance remains strong for the second half of the year, and favorable pricing conditions are expected to persist, encouraging new and existing sponsors to the ILS market.”

Aon Benfield Securities ILS market indices performed well again in Q2 and particularly well over the last 12 months. For Q2 the indices recorded investment returns for the All Bond and BB-rated Bond Indices as reaching 2.20% and 1.33% respectively, while the U.S. Hurricane Bond and U.S. Earthquake Bond Indices saw returns of 2.34% and 1.91% respectively.

For the 12 months up to the 30th June, all indices beat the previous years returns, with the Aon Benfield All Bond and BB-rated Bond Indices returning 12.14% and 8.16% respectively, and the U.S. Hurricane and U.S. Earthquake Bond Indices returning 13.19% and 6.89% respectively. Very impressive annual return figures for the market which is another factor that has been bringing new capital into the market this year.

Looking ahead, Aon Benfield Securities has increased its forecast for issuance for the year, from the $6 billion to $7 billion it suggested previously to now forecast a total issuance of $7 billion to $8 billion for 2013. Aon expects capital will continue to flow into the market as investors prepare for a busy second half of the year. It also expects more new sponsors to come to market and says that it sees potential new entrants looking to cat bonds for coverage.

Aon Benfield Securities is one of the most active structuring and book running firms in the ILS and catastrophe bond market, having been involved in almost half the deals to launch this year. As such its forecast for issuance is typically fairly accurate as it has a good view of the forward pipeline for cat bond deals.

You can access the full report via the Aon Benfield website here.