Swiss Re Insurance-Linked Fund Management

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Q2 insurance-linked securities issuance likely lower than last year: Aon Benfield


Aon Benfield Securities, the investment banking subsidiary of re/insurance broker Aon, has published its latest quarterly update on the catastrophe bond and insurance-linked securities market today. The report looks at the trends within the market in Q1, discusses issues such as the impact of the earthquake in Japan on cat bond returns and looks ahead to Q2 issuance.

Q1 2011 saw four catastrophe bond issuances close which was a positive start to the year when compared to the two cat bonds issued during Q1 2010. Issuance in the last quarter totalled $1 billion compared to $300m for the same period last year. The four deals issued were Swiss Re’s Successor X Ltd. 2011-2, The Hartford’s Foundation Re III Ltd. Series 2011-1, Chubb’s East Lane Re IV Ltd. Series 2011-1 and Munich Re’s Queen Street II Capital Ltd. It was encouraging to see repeat issuances and cat bonds being brought to market by repeat issuers of ILS.

On the new Risk Management Solutions (RMS) U.S. hurricane model update; Aon Benfield say that the catastrophe bond market is still digesting the impact of these changes. They say that while investors may feel the changes and increased wind risk profile justify increased coupons this potential impact has not yet been evident. Aon Benfield suggest that sponsors may be delaying issues while the model changes are fully assessed. That makes sense as Q2 is usually a time for issuance of U.S. hurricane risk bonds and currently we don’t see much activity in that area, although sponsors who hold off too long will risk having to buy retrocessional or reinsurance cover just before the hurricane season starts which could be costly. The report also says that the secondary market is still absorbing the model change.

On the events in Japan Aon Benfield say that they expect to see some reinsurance price increases in areas impacted by major catastrophes this year (so Japan, Australia, New Zealand). This could help to make cat bond issuance more cost effective in these regions and Aon Benfield say that while cat bonds have historically been uncompetitive in pricing here, there could be opportunities to gain momentum going forwards.

Aon Benfield believe that Q2 issuance in 2011 will likely be lower than during 2010 due to recent events. That makes sense given the impact of the events in Japan which put a lot of the market on hold while awaiting news of any losses and with sponsors still digesting the model changes it feels like the market has skipped a month to six weeks of activity meaning issuance could be delayed or put on hold till next year.

Despite the potential for a slower Q2 Aon Benfield say that they do not expect a downward trend in ILS activity. They continue to see interest from investors and issuers alike, particularly in light of the significant amount of catastrophe bond cover which will mature this quarter (nearly $2.4 billion of maturities expected during Q2 2011). The amount of maturities could exert downward pressure on ILS pricing as investors seek to reinvest in the market but investment capital is likely to outstrip supply in the short term.

Abundant investor capital and high interest among the investment community in catastrophe bonds and ILS as a diversification opportunity could make Q2 the perfect opportunity for those seeking to issue private cat bond or ILS transactions purely to satisfy that investor demand. We suspect that there could be more activity in this area going forwards.

Commenting on the outlook for Q2 Paul Schultz, President of Aon Benfield Securities, said: “Aon Benfield Securities continues to see strong ILS interest from both issuers and investors, despite our expectation for lower second quarter issuance than in the same period in 2010. Catastrophe bonds will continue to be an important source of risk transfer capacity for U.S. perils, and potentially more important for non-U.S. risks given recent global events.”

You can download the full report in PDF format here.

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