ILS market faces natural pause in pipeline

The start of the year seemed to see something of a drop in interest in the ILS market, with some fearing that the high levels of losses from the hurricanes and California wildfires of 2017 and 2018 might see a reduction in interest in the ILS market, especially around the January renewal season.

However, as Schultz pointed out, the ILS market is something of a unique entity when it comes to the renewal season. “When you think about the catastrophe bond market, it doesn’t really follow the renewals dates of the traditional product,” he said.

“Although Aon Securities is focused on ILS and not on other collateralised products, our perspective is that the collateralised product renewals were pretty smooth, with no particular execution issues. I think that applies more broadly across all renewals in general, a kind of non-events renewal.”

Looking at the ILS pipeline, Schultz had some caveats however. “Regarding ILS in 2019, there’s obviously been a few transactions that have been completed, but currently we think that it’s going to be a lighter cat bond issuance year and a part of that is the natural renewal of ILS transactions – it’s not a heavy renewal year, given the three- of four-year duration on some cat bonds.”

Schultz said that Aon Securities has been seeing less renewal volume and probably fewer new clients interested in coming into the market. He thinks that part of that is just the fact that there’s less new capacity in general in the collateralised market this year than compared to last year, for example.

As he puts it: “It’s not an unattractive time, it’s just not an overly attractive time, relatively speaking. We are simply seeing less capacity in this market, in part because of the losses of 2017-2018. We’ve seen a high volume of losses over the past two years and the capital providers are being a bit more methodical in terms of putting new capital into the market.”

According to Schultz the cat bonds that renew will be fine, except that there’s not going to be a lot of new capacity entering the market to provide an attractive market for new clients bringing new transactions and so there will be fewer new issues.

He concludes on a more positive note: “We are seeing some capital exit, but that will be a fairly small amount compared to the overall size of the market.  The exiting capital also compounded because we are not seeing a lot of new capital coming into the market, and so there are some challenges in terms of capacity that new issues can attract at the moment. We do expect that dynamic to change for the positive in the second half of 2019."