A report detailing the ILS sector, analysing the key trends witnessed in the 12 months to June 30, 2014, has been released by Aon Benfield Securities. The annual report, Capital Revolution—Alternative Markets Fuel Dynamic Environment, reveals that annual catastrophe bond issuance reached a record $9.4bn – an increase of 41% over the prior year period.
The high volume of catastrophe bonds coupled with 11 sidecar transactions totaling $1.4bn, and collateralized reinsurance vehicles, allowed alternative capital to capture approximately a 20% market share of property catastrophe reinsurance volume during the period under review.
Several records were set during the 12 months, including the highest ever Q2 catastrophe bond issuance of $4.5bn across 12 transactions. First half issuance also reached new heights with $5.9bn of transactions brought to market – exceeding the prior year period by almost 50% (1H 2013: $4.0bn).
As at June 30, 2014, total catastrophe bonds outstanding remained at a record high, with $22.4bn of bonds on-risk – an increase of $4.6bn from the previous year.
A total of 24 catastrophe bonds covering U.S. perils, and five with Europe exposures were issued. Four catastrophe bonds covering Japan perils were brought to market, compared to none in the prior year, proving the strong and increased interest in the use of the capital markets from Japanese sponsors. Seventy percent of property catastrophe bonds utilized indemnity triggers covering regions such as Australia, Europe, Japan and North America.
An estimated $5-6bn of new capital flowed into the sector during the 12 months, bringing total capital inflows to more than $10bn over the past two years.
Meanwhile, market pricing conditions for ILS products continued to decline to attain historical lows, with sponsors benefitting from reductions of 20% or higher as investor demand kept pace with increased supply, allowing sponsors to expand coverage at competitive rates.
Paul Schultz, Chief Executive Officer of Aon Benfield Securities, said: "The 12-month period under review was one of the strongest ever for the ILS and wider alternative capital markets. Sponsors received improved terms including increases in catastrophe bond maturity periods and a continued decrease in interest spreads to historical lows. Improvements in both pricing and terms and conditions also brought a record number of new sponsors to the market. The average duration of catastrophe bonds has increased steadily over the past three semi-annual issuance periods, but the main driver in the market expansion is the large amount of new issuance driven by highly favourable pricing conditions."
On an annual basis, through June 30, 2014 all Aon Benfield ILS Indices posted gains. The Aon Benfield All Bond and BB-rated Bond Indices posted returns of 7.74% and 4.99%, respectively. The U.S. Hurricane and U.S. Earthquake Bond Indices returned 8.94% and 4.33%, respectively.
Each of the Aon Benfield ILS Indices outperformed most of the comparable fixed income benchmarks; the 3-5 Year BB High Yield Index and the S&P 500 index, however, produced superior returns.
To view the full Insurance-Linked Securities 2014 annual update report, please click here
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