ILS market contracts but growth expected in 2020, says Aon Securities

The catastrophe events of 2017, 2018 and 2019 have had a dramatic impact on the dynamics of capacity, collateral treatment, pricing and investor sentiment in the insurance-linked securities (ILS) market, according to Aon Securities’ annual report on the sector. But despite a decrease in the amount of alternative capital in the re/insurance sector as a result in the 12 months to 30 June 2019, the sector has responded well to the catastrophe events, says Aon in the report, adding that the ILS market has proven to be resilient in 2019, with continued support for new issuance. Paul Schultz, chief executive officer of Aon Securities, commented: “In the wake of the recent losses, the suite of ILS transactions and the mechanisms by which they respond have been under the spotlight to a degree not seen before in the sector. The 12-month period reviewed in this report has been educational for market participants, as well as reassuring, due to impaired bonds responding as designed. After this period of contraction, we expect alternative capital to resume its upward growth momentum later this year and into 2020.” The report from Aon Securities, the investment banking division of Aon, reveals that $5.4bn of catastrophe bonds, including life and health, were issued during the period under review. As at 30 June 2019, the amount of alternative capital in the re/insurance sector stood at $93bn – a decrease of $5bn from the preceding period, mainly driven by a reduction in the collateralised reinsurance segment. Catastrophe bond limit on-risk had reached a record $30.3bn (2018: $30.0bn). The report, Alternative Capital: Strength Through Disruption, reveals that, prior to 2017, only seven catastrophe bond classes of notes had been impaired, with losses totalling $900m. Following the hurricanes, earthquakes, wildfires, typhoons and winter storm events of 2017, 2018 and 2019, the market endured anticipated impairments of 25 notes, leading to anticipated bond losses totalling $1.25bn. “The resulting trapped collateral and loss development from these events created a more cautious investor base that shifted some capital to more liquid investments, such as catastrophe bonds. We have also seen investors return to a focus on simplicity. They are now expecting more premium for higher-frequency transactions whilst also shifting preference towards per-occurrence structures,” the report states. In the 12 months to 30 June 2019, $2.71bn in limit was secured through the 21 sidecar transactions that came to market, seven of which were launched by new sponsors, and 14 were renewing entities. Meanwhile, the estimate for in-force ILW limit stood at approximately 6bn, with capital markets investors continuing to be a major driver in the ILW space, both as purchasers of ILW limit and as suppliers of ILW capacity, the report notes. “This represents an issuance volume decrease of $4.3bn relative to the preceding 12-month period. The driving characteristics of the ILS market over the period in review were: i) influence of 2017 and 2018 losses on available capital; ii) schedule maturities of existing catastrophe bonds; and iii) generally, how each of the factors interact with collateral,” states the report. It adds that Bermuda continued to be the Special Purpose Insurer preferred domicile for the 12-month period as 19 issuances used the jurisdiction, with the Cayman Islands accounting for five and Ireland two of the 29 new issues. Two ILS transactions were in the UK, following the legislation was passed two years ago. And three catastrophe bonds were issued out of Singapore using the ILS grant scheme introduced by the Monetary Authority of Singapore in February 2018, to help fund upfront ILS bond issuance costs.

ILS market contracts but growth expected in 2020, says Aon Securities

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