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Sponsors and investors demonstrate continued reliance on insurance linked securities, says Aon


Aon Benfield Securities have today published their latest annual report on the insurance-linked securities and catastrophe bond market titled ‘Consistency & Confidence‘. The report looks at the market over the twelve month period ending 30th June 2011 and examines how the market has performed and any emerging trends in the deals that have been issued.

The report shows that 24 separate catastrophe bond transactions resulted in $4.4 billion of issuance over the year, that’s a slight decrease on the $4.7 billion that Aon Benfield recorded in the previous year although the number of transactions was up slightly from 21. Sidecars experienced a resurgence they said demonstrating investor interest in providing new capital even after a heavy period of market losses.

The figures above for the volume of issuance during the year are not that far below the previous twelve months which is encouraging considering the stagnation in the market both after the Tohoku, Japan earthquake event and the launch of the new RMS U.S. hurricane model. Quite a few regular sponsors held back their deals in recent months, so for the market to achieve levels of issuance that high could bode a healthy outlook ahead (large catastrophe losses allowing).

The total volume of outstanding cat bonds at 30th June was $11.5 billion, which is down on the last few years, but cumulative issuance of cat bonds since 1997 now stands at $37.6 billion. The main reason for the decline in outstanding cat bonds is the high level of maturities from the 2007 issuance year (the largest to date). Aon Benfield expect this trend to change during 2012 as 2009 was a very low issuance year, so the market will have a chance to grow once again. We also believe that new risks being proposed for ILS issuance could help to grow the volume of outstanding bonds over the next year.

Paul Schultz, President of Aon Benfield Securities, said: “Consistency in issuance, including strong participation from repeat issuers, demonstrated the continued reliance of both sponsors and investors on capital markets capacity. Renewed interest in sidecar structures also demonstrates the flexibility of the ILS market to provide fresh capital following market losses. Despite the effects of both the Great East Japan Earthquake on March 11 and the major updates of the RMS U.S. Hurricane and Europe Windstorm models, we anticipate a good catastrophe bond issuance pipeline in the historically active second half of the year. Additionally, we believe the fundamentals are positive for market growth in 2012 and beyond.”

Hurricane risk continues to be the dominant feature of the catastrophe bond market, accounting for 46% of new natural catastrophe ILS issuances in the twelve month period. European windstorm risks accounted for 19% (an increase from 9% in the previous twelve month period) while U.S. earthquake accounted for 15%. Life and health ILS issuance was strong, with $525m taken to market which makes the last twelve months the second largest issuance year after the period ending 30th June 2007.

The report also covers the Aon Benfield ILS Indices, all four of which posted gains during the twelve month period. Global catastrophe losses, the Muteki cat bond loss and downgrades on some other cat bonds have caused mark to market losses which resulted in most of the indices posting much lower gains than during the previous year. The Aon Benfield All Bond index posted a gain of 5.97%, the BB-rated Bond index 4.52%, the U.S. Hurricane Bond index 8.51% and the U.S. Earthquake Bond index gained 7.21%. The U.S Earthquake Bond index was the only one to have posted a larger gain than in the previous year.

The report says that sponsors have yet to see a significant price advantage in ILS and cat bonds as reinsurance has remained more competitive, however sponsors continue to recognise the benefit of diversifying their sources of reinsurance by periodically using the ILS markets. We believe this trend could be on the cusp of changing as reinsurance price pressure continues to be a talking point and sponsors and arrangers of transactions find new and innovative ways to cut the costs of cat bond and ILS issuance (as evidenced in some recent transactions).

On the investment side, the report shows the high demand that has been seen in the last twelve months as ILS and cat bonds have raised their profile to the investment community. Of the categories of investors that Aon Benfield Securities have dealt with in transactions they have been part of, institutional investors are the category which has shown the most growth as investors look for assets which have a low correlation with the wider financial markets. Mutual funds also increased their stake in the deals Aon Benfield worked on, although they say that no new mutual funds entered the market. They do say that they are aware of several mutual funds who are actively looking at entering the sector though. Switzerland was the domicile which saw the largest influx of investment capital into the sector, almost doubling its share of the deals Aon Benfield participated in. Aon Benfield reflect our view that investor interest in ILS and cat bonds is at an all time high.

The report also discusses the emergence of private cat bond transactions. Aon Benfield say that the private deals add flexibility to the market and allow for deals to be issued that would not meet or without meeting the rigorous 144a regulatory requirements. They also say that the private deals allow sponsors to test out the cat bond market and that over the longer term private ILS and cat bond deals could be a catalyst to issuance and the growth of the market.

Aon Benfield say that the outlook for the rest of 2011 for the catastrophe bond market looks positive, with strong investor demand and issuances from both repeat and new sponsors expected. They expect non-U.S. perils to be a feature and mention Europe and regions that have recently experienced natural catastrophe losses as regions that will feature.

The report discusses all of the catastrophe bond and insurance-linked security deals issued in the last twelve months and provides statistics and analysis on the health of the market. It also looks at sidecar activity and industry-loss warranty (ILW) usage over the last year. You can download the full report in PDF format from this press release page of the Aon website.

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