Total catastrophe bond issuance for calendar year 2016 reached $5.8 billion – a decrease from US$6.9 billion in 2015 – principally due to ongoing competitive re/insurance market conditions, according to an Aon report.

The first quarter of 2016 saw a robust level of cat bond issuance – with a record $2.2 billion of bonds launched, or $521 million more than the previous all-time record for Q1 issuance set in 2015, said the report titled “Insurance-Linked Securities Year-End 2016 Update,” published by Aon Securities, the investment banking division of Aon Benfield.

“Despite the strong start to the year, lower issuance volume was recorded throughout the remainder of 2016, most noticeably in the second quarter, which historically witnesses higher issuance levels given its concurrence with the start of the North America hurricane season,” the report said, noting that levels for the full year were never able to recover from the lower second quarter levels.

Nevertheless, the “meaningful level of late 2016 and early 2017 catastrophe bond maturities, resulted in strong market demand towards the end of the year, with many Q3 and Q4 transactions upsizing to reach significant capacity,” said the report.

Largest Transaction

During the fourth quarter, five catastrophe bond transactions came to market totaling $2.4 billion, including the largest transaction of the year with Galilei Re Ltd., which secured $1.3 billion on behalf of XL Bermuda Ltd., the report noted.

Looking ahead to the first half of 2017, the Aon report said, a record amount of catastrophe bonds will mature, with US$6.4 billion coming off-risk.

The market environment suggests the prevalence of a competitive alternative reinsurance market and potentially strong levels of primary issuance, the report said. Taking into account issuance from repeat and new sponsors, Aon Securities predicted 2017 primary catastrophe bond issuance of $8 billion, which would approach record levels. (Cat bond issuance in 2014 reached $8.2 billion, the record level to date).

“Given the positive market response already witnessed in late 2016, we expect investors to reinvest available capital and continue to support large competitive alternative reinsurance transactions,” commented Paul Schultz, chief executive officer of Aon Securities.

“In the context of the macroeconomic environment, we see investors finding continued value in the alternative ILS asset class given the diversification benefit, and expect continued sector growth regardless of outcomes in either interest rate or equity markets,” he added.

Value in ILS Asset Class

Indeed, the report indicated that alternative capital investors’ returns are higher than can be obtained in most other vehicles.

For the annual period ended Dec. 31, 2016, all Aon ILS Indices posted positive results, the report noted. The Aon All Bond and BB-rated Bond indices posted returns of 7.03 percent (2015: 3.51 percent) and 4.97 percent (2015: 2.00 percent), respectively. The US Hurricane and US Earthquake Bond indices returned 7.05 percent (2015: 5.01 percent) and 4.84 percent (2015: 2.85 percent), respectively.

The Aon All Bond Index outperformed relative to comparable fixed income benchmarks with the exception only to the three-to-five year BB U.S. High Yield Index which returned 11.66 percent, and the S&P 500 Index, which returned 9.54 percent during the period under review.

The entire “Insurance-Linked Securities Year-End 2016 Update” report, can be found on Aon’s thought leadership portal.

Source: Aon Securities