Aon Benfield Securities, the investment banking of reinsurance broker Aon Benfield, have today published their report which looks back at the insurance-linked securities and catastrophe bond market during the first quarter of 2012. In the report they review all of the transactions which came to market, and some which began marketing, during the quarter which saw record cat bond and ILS issuance of $1.49 billion worth of transactions completed within the quarter.
Issuance during the first quarter of 2012 was the most active for any first quarter on record and Aon Benfield Securities say that investors embraced this by deploying additional capital into the sector to keep up with the deal flow. Thanks to this several transactions managed to increase in size as investors oversubscribed to the books and sponsors took advantage of this to secure additional cover. The momentum within the cat bond and ILS market, which began in 2011 when Q4 issuance was strong and carried on through the first quarter and into the second of 2012, combined with an active pipeline, should enable the ILS and cat bond market to achieve between $5 billion and $6 billion of volume by the end of the year, say Aon Benfield Securities in the report.
Paul Schultz, Chief Executive Officer of Aon Benfield Securities, said; “We are very pleased with the record volumes of ILS activity we saw in the market during the first quarter of 2012, which highlights the importance of ILS as both a risk transfer vehicle and an investment product. We believe that the market fundamentals are conducive to further growth in this sector and very pleased that issuance in the first quarter of 2012 came from both new and repeat sponsors.”
The report, Insurance-Linked Securities First Quarter Update 2012, which was published today by Aon Benfield Securities looks at each of the transactions which came to market in Q1 and also looks at ILS sales and distribution activity. The report also includes an insightful report with Michael Stahel of specialist ILS investment manager Clariden Leu (soon to be part of LGT Group).
The report also includes a look at Aon Benfield’s ILS Indices, which posted negative returns for the quarter principally reflecting spread widening, with the All Bond and BB Rated Bond Indices decreasing by 0.06% and 0.14% respectively. While negative, this is an improvement over Q1 2011 returns, which were negatively affected by mark-to-market losses from the Tohoku earthquake in Japan. Meanwhile, the U.S. Hurricane Bond and U.S. Earthquake Bond Indices decreased by 0.32% and 0.17% respectively during the period. Over the 12 months up to the end of Q1 all of the indices posted a gain, with the All Bond managing 3.93% (down on 2011’s 5.1%), the BB Rated Bond Index managed 5.1% (actually up on 2011’s 3.41%), the U.S. Hurricane Bond managed 3.55% (down on 2011’s 7.75%) while the U.S. Earthquake Bond Index managed 2.84% (down on 2011’s 6.72%). Those returns, while down on the previous 12 months are still very attractive to investors seeking uncorrelated investment opportunities.
Aon Benfield Securities acknowledge that they hadn’t expected the drop in returns of outstanding cat bonds to be quite so significant in Q1 as they admit that their forecast at the end of 2011 hadn’t accounted for such a large decline. In their 4th quarter review they forecasted that index returns in the first half of 2012 would be driven by coupons, rather than by any mark-to-market gains. In this prediction they were half right, as coupons have been driving price returns, but they hadn’t expected to see mark-to-market losses as we have been seeing so far this year. Despite this, Aon Benfield Securities say that they expect to see positive returns across the whole year in the absence of any severe catastrophe events.
As ever it’s a comprehensive look at the last quarter in the cat bond and ILS market from one of the most active structuring and arranging teams and as such well worth a read. You can download the full report here.