The record start to 2016 for the catastrophe bond and insurance-linked securities (ILS) market “bodes well” for the rest of the year, according to Paul Schultz of Aon Securities, particularly when the competitive nature of reinsurance markets are considered.
The quarterly ILS market reports are coming thick and fast, with the latest being from Aon Securities, the investment banking, capital markets and ILS structuring unit of insurance and reinsurance broker Aon.
Schultz, CEO of Aon Securities, reflects on the records broken during the first-quarter of 2016, with both Q1 issuance and the size of the outstanding market achieving new highs.
“With market volume typically concentrated around the important reinsurance renewals periods of Q2 and Q4, the strong start to 2016 bodes well for the year ahead,” Schultz explained.
Aon Securities explains that a record $2.22 billion of cat bond or ILS issuance was issued in Q1 2016, ultimately the same figure as we reported in the recent Artemis Q1 2016 Catastrophe Bond Market Report.
Just as impressive is the fact that with Q1 2016 cat bond and ILS issuance outstripping maturities significantly, the market grew in outright size, with $25 billion outstanding by Aon Securities reckoning at the end of the quarter.
This is below the record outstanding market size according to Artemis, of $26.516 billion, at the end of Q1 2016, as Aon Securities does not include quite as many of the private deals as we do.
Schultz went on to comment that the record level of catastrophe bond issuance in Q1 2016 is particularly impressive “in light of the prevailing competitive (re)insurance landscape.”
One of the factors affecting cat bond and indeed ILS market growth is just how competitive pricing is in the traditional reinsurance market. At times when reinsurers are feeling particularly under-pressure, their pricing can make accessing the alternative capital through ILS securitisations prohibitive for sponsors.
However, and perhaps a sign of the increasing understanding of the alternative capital options, as well as growing acceptance of instruments such as cat bonds, Q1 saw records broken as cedents showed their determination to continue to access ILS capital and diversify their sources of reinsurance with the capital markets.
Schultz noted that, in Aon Securities opinion, the competitive reinsurance market “contributed to the more moderate issuance volumes of Q4 2015.”
The record level of issuance seen in Q1 2016 was an impressive 30% increase on the previous Q1 record, set in 2015.
Interestingly, Aon Securities notes that the weighted average expected loss of Q1 2016 cat bond issuance was up on the previous year, which likely reflects investor appetite for higher spreads as well as cedents desires to optimise their catastrophe exposures in light of changes to rating and regulation factors.
In Q1 2016 the expected loss average was 2.46%, more than 30bps up on Q1 2015, which Aon Securities says demonstrates” the competitiveness of alternative markets at higher risk levels.”
However, the report also notes that investors were supplied with a wide range of cat bond risk profiles, with transactions in Q1 offering a “wide range of expected losses” from as low as 0.01%, up to 11.41%, while risk interest spreads had a similarly diverse range from 2.15% to 16.25% during the quarter.
“The varied transactions demonstrated ILS’ ability to offer a wide spectrum of risk-return profiles to investors in this diversifying alternative asset class,” Aon Securities explained.
This level of diversity in risk/reward is beneficial to the catastrophe bond market, as it offers something attractive to many different kinds of investors, with differing return requirements, and also provides an example to cedents that the ILS market is open to many different layers of risk.
As Aon Securities notes in its report, the record levels of catastrophe bond and ILS issuance, as well as this diverse range of transactions, with something to suit most investors, does bode well for the remainder of 2016.
However, the mid-year reinsurance renewals could be key, with the competitiveness of traditional reinsurers likely to either drive more issuance, or translate into more opportunities for collateralised reinsurance markets.
But that could benefit the ILS funds and their investors either way, as the efficiency of the capital markets and diversification of sources of risk capital remains a key attraction for cedents which could help to continue this impressive level of market activity.
Download the full Q1 ILS market report from Aon Securities here.
Artemis’ Q1 2016 Catastrophe Bond & ILS Market Report – Another record first-quarter
We’ve now published our Q1 2016 catastrophe bond & ILS market report.
This report reviews the catastrophe bond and insurance-linked securities (ILS) market at the end of the first-quarter of 2016, looking at the record $2.215 billion of new risk capital issued and the composition of the cat bond & ILS transactions completed during Q1 2016. The report also includes a review of global property catastrophe reinsurance pricing trends and commentary on dedicated reinsurance sector capital from co-editor GC Securities.