Extreme weather events have driven spike in ILS impairments

Following the difficult years of 2017 to 2019, which were dominated by extreme hurricanes, earthquakes, wildfires, typhoons and winter storm events, 25 insurance-linked securities (ILS) bonds are expected to be impaired in the 12-month period to June 30.

These impairments are predicted in an Aon Securities annual report on the ILS sector, Alternative Capital: Strength Through Disruption, to generate bond losses totalling $1.25 billion.

This represents a dramatic increase in impairments. Only seven catastrophe bond classes of notes had been impaired before 2017, with losses totalling $900 million.

This increase has had a dramatic impact on the dynamics of capacity, collateral treatment, pricing, and investor sentiment, said the report, which analysed the 12-month period to June 30, 2019.

The report found that $5.4 billion of catastrophe bonds were issued in the 12 months to the end of June, including in the life and health sector.

Catastrophe bond limit on-risk also inched up to a record $30.3 billion in that period, from $30.0 billion in 2018.

Paul Schultz, chief executive officer of Aon Securities, said: “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 market can take encouragement from the fact that impaired bonds have responded as designed, Schultz said.

“After this period of contraction, we expect alternative capital to resume its upward growth momentum later this year and into 2020,” he predicted.

There were 21 sidecar transactions in the 12 months to June 30, seven of which were launched by new sponsors, and 14 were renewing entities. Between them they secured $2.71 billion in limit.

Meanwhile, the estimate for in-force industry loss warranty (ILW) limit stood at approximately $6 billion. Capital markets investors continued to be a major driver in the space, as both purchasers and suppliers.

There was $93 billion of alternative capital in the re/insurance sector at the end of June, a decrease of $5 billion from the previous year, mainly driven by a reduction in the collateralised reinsurance segment, the report said.