ILS momentum to continue in 2018 as demand persists: Aon Securities

Global catastrophe bond issuance broke records in 2017 and despite the impacts of catastrophe loss events, insurance-linked securities (ILS) market momentum is expected to persist throughout 2018, according to Aon Securities.

According to Aon Securities, the investment banking division of global reinsurance intermediary and capital advisor Aon Benfield, catastrophe bond issuance reached $10.7 billion in 2017, the first time in the market’s history issuance has breached $10 billion in a single year, helping the outstanding market at year-end 2017 hit $25.7 billion.

However, it’s worth noting that according to Artemis data and including the private transactions we cover, catastrophe bond and related ILS issuance totalled $12.6 billion in 2017, lifting the outstanding market size at year-end to a record $31 billion.

But regardless of the numbers, 2017 was clearly a record-breaking year for the ILS market, as well as the sector’s biggest test to date, driven by large catastrophe losses in the final two quarters of the year.

As noted by Aon Securities in its ILS Year-End 2017 Update report, a series of catastrophe events in the second-half of last year did impact the pricing on some catastrophe bonds, but the marketplace responded well and overcame the challenges, with new capital entering the sector as year-end approached.

In 2018, Aon Securities expects another strong year for catastrophe bond issuance, with the ILS marketplace expected to maintain a lot of the momentum that it gained in 2017, with new sponsors and investors entering the market while existing sponsors are expected to renew maturing capacity.

Aon Securities Chief Executive Officer (CEO), Paul Schultz, commented; “The ILS market had a very strong 2017, with several new records being set and alternative capital rising to new heights in the reinsurance marketplace. We expect to see a gradual broadening of the scope of ILS products, making them an even more common risk transfer tool for re/insurers, with continued support from investors for this diversifying asset class.”

According to Aon Securities, catastrophe bond issuance in 2018 will be between $8 billion to $9 billion, which would make it one of the strongest issuance years on record after 2017, 2014, and 2007, as shown by the Artemis Deal Directory and Artemis quarterly ILS and cat bond market reports.

Aon Securities’ latest ILS market report also states that the broader alternative capital space also increased in size during 2017, reaching $89 billion, which is driven in part by catastrophe bond market expansion but also by the continued growth of the collateralised reinsurance market.

“Historically, one of the big issues for ILS is being characterized as an untested source of capacity when compared to traditional reinsurance. In the wake of the largest loss-causing year ever, ILS rose to the occasion and continued to prove to be an efficient source of capital, further demonstrating its value to the reinsurance market,” said Aon Securities.

It will certainly be interesting to see just how strong catastrophe bond issuance is throughout 2018, and whether sponsor and investor appetite can match last year on the back of the market’s first real test, which, as noted by Aon Securities, it appears to have passed admirably.