Aon Benfield Securities have today published their report looking at the catastrophe bond market during the third quarter of 2010. These reports are a great way to look at the general market health and outlook for the next quarter. As well as a look at the transactions which occurred the report also discusses the Aon Benfield ILS Indices and how they have fared.
Issuance for the third quarter was largely in line with Aon’s expectations, the third quarter is historically a time of light issuance and this year was no different with just two new catastrophe bonds coming to market (Shore Re Ltd. and Green Valley Ltd. are the two deals in question, read all about them over on our cat bond deal directory). The third quarter is right in the middle of the Atlantic hurricane season and as such is seen as a time to reflect on the year to date and watch carefully to see how existing bonds may be impacted. That said, it doesn’t mean investor demand does the same, this year has seen strong demand which as we wrote earlier, even pushed Clariden Leu to issue their cat bond lite. The two deals which came to market only brought $232m in risk capital, so one current concern is that the actual size of investment opportunity is decreasing at a time when demand is rising (we’re hearing that from investors and industry participants).
The graph below (taken from Aon’s report) shows the way the market has grown but outstanding risk capital is actually shrinking. There are more deals to mature by year end but new issuance should keep the outstanding total fairly stable for the next few months.
Issuance has been hurricane heavy this year and the recent issuance of Green Valley Ltd. and the currently marketing Calypso Capital Ltd. European windstorm cat bonds will help to provide the diversification opportunities investors seek. Aon says that they expect to see more than $500m of new issuance in European windstorm risks by the end of the year. That will help soak up some of that demand, but to truly satisfy the investment funds we really need to see some other risks such as Japanese quake coming to market. The report highlights an interesting difficulty with European windstorm cat bonds which is that the different approaches of risk modellers is creating different modelled outcomes which for investors can be difficult to understand and cause nervousness in the market. The report highlights the increasing use of PERILS AG as a positive move to reduce variability in modelled outcomes.
Paul Schultz, President of Aon Benfield Securities, said: “Year-to-date issuance in the ILS market has been dominated by transactions covering U.S. Hurricane, pushing investors’ exposure to previously unseen levels. This phenomenon has led to strong investor demand for insurance-linked securities without U.S. Hurricane risk, in an ongoing attempt to achieve diversification across their portfolios. With some rebalancing of investors’ portfolios and scheduled upcoming maturities, demand for U.S. Hurricane risk will improve into the fourth quarter.”
It is possible that if we emerge from the hurricane season without a single major loss we could see a flurry of U.S. hurricane cat bonds as issuers take advantage of increased investor appetite. That could help to put some capital back into the marketplace to satisfy investor demand.
The report shows that the recently created Aon Benfield ILS Indices have posted really strong returns driven in the main by an increased demand but also by the benign hurricane season. One thing we have noticed lately in discussions with market participants is that investors are being influenced by indices such as Aon’s and Swiss Re’s; they are helping to advertise the opportunity within the market to new investors and this is helping increase the investor base.
Download the full report from Aon here.