Record Q1 shows investors aware of “inherent value” of ILS: Schultz, Aon Securities

The record level of catastrophe bond issuance witnessed in the first-quarter of 2018, on the back of the huge level of 2017 catastrophe losses, shows how investors are aware of the inherent value of ILS and are increasingly comfortable with the risks, according to Paul Schultz, Chief Executive Officer (CEO) of Aon Securities.

Aon Securities, the investment banking unit of reinsurance broker Aon Benfield, has released its Q1 2018 ILS market update, which notes record catastrophe bond issuance in the period of $3.58 billion, across ten transactions.

According to Aon’s figures this is a new record for the quarter, and easily exceeds the issuance volumes of 2016 and 2017 of roughly $2.2 billion.

It is lower than the $4.24 billion of new risk capital brought to market through 17 deals that we recorded here at Artemis, including private syndicated transactions, life related risks and other perils such as mortgage insurance risk securitisation.

However, it remains a record quarter on both sets of numbers, reflecting the ability of the ILS sector to bounce back from its largest ever losses and trade forwards effectively, to provide continuity in reinsurance and retrocession coverage to ceding companies.

Combined with Q1 2018 maturities, issuance in the period saw the total volume of on-risk catastrophe bonds, as at the end of the first-quarter, reach a new market high of $29 billion, according to Aon Securities.

Again, this is below the $32.83 billion and almost $1.8 billion of growth that we recorded at Artemis, across all of the catastrophe bond and syndicated ILS transactions we track in our Deal Directory.

Schultz, commented on the record level of Q1 issuance, “The first quarter catastrophe bond issuance figure has set a positive tone for the remainder of 2018. Following the potential losses that could have been incurred from the series of 2017 natural disaster events, investors in this sector could easily have taken a ‘wait-and-see’ approach.

“However, given the record levels of issuance seen during the first three months of the year, it is clear they are aware of the inherent value of ILS and are comfortable with the associated risks.”

In the aftermath of 2017 catastrophe events a number of market participants questioned the longevity of ILS capacity, essentially suggesting investors would run for the hills and seek alternative investments when losses finally started to take place.

However, this was far from the case, and the ILS market actually increased in size in time for the January 1^st, 2018 reinsurance renewals season, underlining the commitment of the investor base to the space and, as noted by Schultz, their increased maturity and understanding of the ILS market and the associated risks.

This meant that instead of either leaving the space entirely or waiting on the sidelines to see what happens in a new market landscape, investors didn’t hesitate to reallocate to the space immediately after losses, which is testament to the sophistication of both the sponsor and investor base.

Looking forward, Aon Securities says that it feels this momentum will continue into the second-quarter and beyond, a view that the recent pace of deal-flow activity supports, suggesting that catastrophe bond and ILS issuance for the full-year 2018 could again break issuance and outstanding market size records.

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