ILS market robust even as catastrophe bonds suffer losses: Aon

The market for Insurance-Linked Securities (ILS) is resilient in 2019 with continued support for new issuance, despite hurricanes and other events leading to a challenging market.

That’s the conclusion of Aon Securities’ annual report on the ILS sector. The sector is poised to resume growth following its plateau in 2018, said Aon, and catastrophe bond levels are consistent year-over-year, despite challenging market conditions.

The report, Alternative Capital: Strength Through Disruption, said that $5.4 billion of catastrophe bonds, including life and health, were issued during the year to June 30, 2019.

Prior to 2017, only seven cat bond classes of notes had been impaired, with losses totalling $900 million, said the report. 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 $1.25 billion.

This concentrated level of loss was digested by the market during the year under review, with a dramatic impact on the dynamics of capacity, collateral treatment, pricing, and investor sentiment, said Aon.

There has been continued support for new issuance, with $5.1 billion of property catastrophe deals coming to market during the 12 months, while $4.2 billion of property cat bonds matured.

“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,” said Paul Schultz, chief executive officer of Aon Securities. “The (year) 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.”

As at June 30, the amount of alternative capital in the re/insurance sector stood at $93 billion, down $5 billion from the preceding period, mainly driven by a reduction in the collateralised reinsurance segment, said Aon.

Aon Securities is the investment banking division of leading global professional services firm Aon.

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