Strong capital inflows bring ILS & cat bond market to new high: Aon Benfield

Assisted by strong levels of new capital flowing into the space, the market for insurance-linked securities and catastrophe bonds reached a record of $17.5 billion outstanding cat bonds after $6.7 billion of new issuance in the twelve months to June 30th 2013, according to Aon Benfield Securities.

The latest annual report on the insurance-linked securities market from Aon Benfield Securities, the capital markets and investment banking focused division of global insurance and reinsurance broker Aon, was published on Friday. The report discusses the record levels of capital interest being shown in ILS, cat bonds and reinsurance-linked investments over the last year.

Aon Benfield Securities runs its annual reports from the mid-year, so the numbers differ to other reports and our own statistics. However the report is among the most comprehensive and provides a great deal of insight into the primary issuance market for ILS and cat bonds, the secondary trading market for ILS and cat bond notes as well as trends seen in alternative reinsurance capital and the convergence of capital and reinsurance markets.

In the year to June 30th, Aon Benfield Securities recorded $6.7 billion of new cat bond and ILS issuance, the second highest year in its records after the year ending 30th June 2007, which has helped the amount of cat bonds active in the marketplace reach $17.5 billion, a new all time high.

Catastrophe bond issuance by year (years to June 30th) - Source: Aon Benfield Securities

The $17.5 billion of outstanding catastrophe bonds figure reached at the mid-point of the year, a new high for the market in terms of risk capital outstanding, shows significant growth over the previous twelve months. It is an increase of $2.6 billion on a year earlier, at June 30th 2012, when the amount of cat bonds outstanding was just over $14.9 billion.

It is also significantly higher than the previous record of risk capital outstanding, reached at June 30th 2006, when the market stood at $16.15 billion of cat bonds at risk. Further growth in cat bonds outstanding is expected by the end of 2013 and by the next mid-year and other reports on the market show risk capital outstanding as already over $18 billion thanks to continued strong issuance post-June.

Outstanding and cumulative catastrophe bond volumes (years to June 30th) - Source: Aon Benfield Securities

Strong capital inflows from both new and existing investors in the asset class have helped the market to grow rapidly in 2013 to date. The inflows of capital helped to drive the decline in spreads and pricing which has in turn increased sponsors interest in ILS and catastrophe bonds as a viable and cost-effective alternative to traditional reinsurance.

Aon Benfield Securities estimates that as much as $3 billion of new capital has flowed into the sector in the first six months of 2013. Those levels of capital inflow are expected to continue as long as issuance remains strong, which in turn will help the market to increase in outright size.

Since January 2012 Aon Benfield Securities estimate that new capital inflows could have been as much as an additional $5 billion to $ 6 billion, helping the last two years of strong market growth. The pressure this increased interest placed on spreads helped sponsors to achieve price decreases of as much as 35% to 40% compared to issuances at the end of 2012, making cat bond issuance in 2013 at times cheaper than traditional reinsurance alternatives. This also helped to spur on stronger issuance of new bonds.

27 new cat bond transactions, including 3 from the life and health sector, closed in the twelve months to June 30th and indemnity triggers accounted for more than half of the property cat bonds issued, or 13 of the total deals closed. There were a number of new features in transactions, including deals with longer terms, flexible reset facilities and a transaction containing commercial property and energy risks, all demonstrating the markets continuing maturation.

The new record level of catastrophe bonds outstanding demonstrates the recent expansion of the ILS market, as capital market investors became increasingly attracted to the space and investors such as pension funds grow their allocations to catastrophe risk and reinsurance. Aon Benfield Securities forecasts that the market will continue to grow, despite upcoming maturity levels being high because of the increased issuance after the financial crisis.

Aon Benfield Securities believes that issuance will outweight maturities in the years to come, which will please investors with capital to deploy and pension funds who have yet to access the asset class. This will also please investment managers who need to have the confidence that the market will grow to enable them to raise more capital from existing investors.

Catastrophe bonds maturing by year (years to June 30th) - Source: Aon Benfield Securities

The first half of this year has seen $4 billion of new cat bond issuance, excluding cat bond lite and private transactions, which is the second highest half-year cat bond issuance on record after the first-half of 2007. By August 23rd, when the report was written, Aon Benfield Securities had already counted $1.1 billion of cat bonds issued in Q3. This Q3 may become the highest issuance third-quarter on record, beating even Q3 2007 when the largest ever single cat bond issuance of $1.2 billion (Merna) was included.

Aon Benfield Securities remains bullish on the prospects for the market through the rest of 2013. It believes that repeat and new sponsors will continue to access the cat bond market to access the attractive issuance conditions through the rest of the year and sees ongoing strong demand from investors.

Conditions remain positive for the rest of 2013, according to the report, and Aon Benfield Securities forecasts total cat bond issuance in 2013 will reach $7 billion to $8 billion in total.

Paul Schultz, Chief Executive Officer of Aon Benfield Securities, commented; “In the 12 months under review, the insurance-linked securities sector witnessed large capital inflows from both existing and new investors. Since the beginning of 2013, as estimated USD3 billion in new capital has flowed into the ILS market.  Sponsors launched new issuances to satisfy this investor demand, which resulted in decreased spreads and brought the pricing of ILS into the realm of the traditional reinsurance market. Given the current strong demand for ILS products, we believe that the 2013 calendar year could prove to be an inflexion point for the sector, with momentum for new issuances continuing to build as investors and sponsors seek to leverage the favorable market conditions.”

We will cover some other areas of the annual cat bond and ILS market report from Aon Benfield Securities over the coming days. You can access a full copy of the 76 page report via this press release.

For details of every catastrophe bond transaction issued over the last twelve months visit our Deal Directory.

More reading:

There are so many reports and commentaries coming out on alternative reinsurance capital and ILS in the run up to the Monte Carlo Rendezvous event that we felt it worth highlighting some other reading on the topic, all from the last week or so, which you can find below (most recent first):

– Demand for alternative reinsurance instruments and ILS to continue: Fitch

– Alternative capital the biggest challenge for traditional reinsurers: Moody’s

– Lloyd’s Nelson warns on ‘systemic’ risk of alternative reinsurance capital

– Broker facilities an opportunity for third-party capital to expand reach?

– Opportunity for reinsurers to learn from ILS: Aon Benfield CEO

– Capital markets investors boost global reinsurer capital to $510 billion (including a useful list of links to many alternative reinsurance capital initiatives that we have covered previously)

– Strong capital inflows bring ILS & cat bond market to new high: Aon Benfield

– Alternative capital a disruptive force in reinsurance: Goldman Sachs