Cat Bond Coverage Reaches Record $20 Billion: Aon Benfield ILS study

January 14, 2014

In its latest report Aon Benfield Securities, the investment banking division of global reinsurance intermediary and capital advisor Aon Benfield, noted that the fourth quarter of 2014 continued to see more Insurance-Linked Securities [ILS]. Eight catastrophe bonds closed during the period with a total value of $1.9 billion, contributing to a second half issuance total of $3.5 billion across 16 transactions, and a calendar year issuance total of $7.5 billion.

Aon Benfield’s report indicates that as of December 31, 2013, “total catastrophe bond limit outstanding had reached $20.3 billion – the highest level in ILS market history. A broad array of coverage was offered during the fourth quarter, including Australia earthquake and cyclone, Europe windstorm and U.S. perils.”

The report also said the “market for sidecars was active in the fourth quarter as several sponsors including Alterra Capital, Aspen Re and SCOR were able to fund vehicles prior to year end. Additional sponsors marketing sidecars during the fourth quarter included ACE, Munich Re, Argo Group and Validus Re.

“Market pricing conditions for ILS products remained in line with the historical lows seen throughout the year, as strong demand for catastrophe bonds continued among sponsors and investors.”

Aon Benfield Securities CEO Paul Schultz commented: “The fourth quarter of 2013 saw the maintaining of robust ILS issuance volumes and ever increasing interest from both sponsors and investors. When we look back at the year as a whole, we see that the ILS sector has recorded a ground-breaking 12 months, where ILS pricing decreased to levels that are highly competitive with traditional reinsurance. In certain peak zone areas, we have seen catastrophe bonds become a more cost effective risk transfer mechanism than solutions available in the traditional market. We expect 2014 to see continued inflows of capital and the ILS sector to make further progression.”

The Insurance-Linked Securities Fourth Quarter 2013 Update report highlights that, for the quarterly period ending December 31, investment returns for the All Bond and BB-rated Bond Indices reached 1.98 percent and 1.31 percent respectively, while the U.S. Hurricane Bond and U.S. Earthquake Bond Indices recorded returns of 2.06 percent and 1.04 percent respectively.

The Aon Benfield All Bond index outperformed all comparable fixed income benchmarks for the quarter.

For the trailing 12 months all indices posted positive returns with the All Bond, U.S. Hurricane Bond, and U.S. Earthquake Bond Indices outperforming their 2012 results, and the BB-rated index underperforming the prior year period by 40 basis points.

Aon Benfield Securities forecasts that in the absence of severe catastrophe events, 2014 will be another positive year for the ILS market, characterized by a broader spectrum of available risks and perils, and expanded coverage to lower layers of reinsurance cover.

The full Insurance-Linked Securities Fourth Quarter 2013 Update report is available.

Source: Aon Benfield Securities

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