ILS market maintains momentum in Q2 2015, life ILS at a high: Aon

In Q2 the insurance-linked securities (ILS) and catastrophe bond issuance market “maintained much of the momentum” it created during the record first-quarter of this year. Ongoing interest in ILS helped the market to the highest level of life and health risk transferred since 2007.

Aon Securities latest report on the ILS market, published today, delves into the transactions that it tracked during the second-quarter of 2015. The capital market’s arm of insurance and reinsurance broker Aon recorded $2.96 billion of issuance in Q2.

The figures quoted by Aon Securities in its ILS market report are lower than those Artemis tracks, as we include private cat bond or ILS transactions which helped to take our second-quarter 2015 issuance figure to $3.162 billion.

Momentum continued on the issuer side, with a Aon Securities recording ten transactions, as sponsors sought reinsurance protection from the capital markets. Encouragingly new sponsors continue to be seen, with the highlight from the report the first European earthquake reinsurance cat bond with an indemnity trigger from UnipolSai, Azzurro Re I Limited.

Other highlights from issuance were the first U.S. wind cat bond with a parametric trigger since 2005, in Compass Re II Ltd. (Series 2015-1), which Aon Securities report says delivered “relative cost savings versus AIG’s indemnity 2014 Tradewynd Re Ltd. North America multi-peril transaction.”

Commenting on the brisk Q2 activity in ILS issuance, Paul Schultz, Chief Executive Officer of Aon Securities, said; “Whilst not quite matching the record-breaking second quarter of 2014, results during second quarter 2015 were highly encouraging and maintained much of the momentum created during the first quarter of the year.”

Aon Securities now places first-half 2015 ILS and cat bond issuance at $4.66 billion, again below the $5.224 billion that Artemis recorded including private cat bond deals.

For Aon Securities the outstanding market grew 6% from the end of Q1 2015 to the end of Q2 2015, finishing the half-year at $23.47 billion (again a little below Artemis’ figure of $24.547 billion).

Schultz notes an interesting development, that life and health linked ILS issuance has reached the highest point since 2007. He said; “It is worth noting that the second quarter saw the issuance of a large extreme mortality bond that brought total life and health catastrophe bond issuance for 2015 to the highest level since 2007.”

The Aon ILS Indices were largely positive during the second-quarter, outperforming the S&P500 index during the period, although the ILS index returns remain below historic highs.

Over the three months to June 30th 2015, the Aon All Bond, U.S. Hurricane Bond, and U.S. Earthquake Bond indices were all positive, with gains of 0.53%, 0.33%, and 0.37% respectively. The Aon BB-rated Bond Index posted a negative result of -0.04%.

Aon Securities notes that; “The annual returns for all Aon ILS Indices underperformed the prior one year returns as keeping pace with the historic Aon ILS average annual returns remains challenging given the current market environment without a major catastrophe loss or an increase in the overall level of risk ceded to the market.”

However, the asset class continues to demonstrate its value over the cycle for those with longer-term investment horizons, for whom ILS is typically considered a more suited asset class.

Aon Securities explained; “The 10-year average annual return of the Aon All Bond Index, 8.23 percent, again produced superior returns relative to the other benchmarks. This demonstrates the value a diversified book of pure insurance risks can bring to long term investors’ portfolios.”