Mid-year waypoint sees ILS market well placed

There are no major implications for the insurance-linked securities (ILS) market from the Fort McMurray wildfire that ripped through a major oil-producing area of Canada in May this year, according to Paul Schultz, chief executive officer of Aon Securities.

“It’s possible that we might see some losses flow through from some of the collateralised/retro exposure, but nothing that will have a significant impact on market behaviour,” Schultz says.

Looking back at the first half of 2016, Schulz says that in terms of catastrophe bonds the first quarter had been a very strong period for issuance, but that the second quarter had been below expectations, with issuance volumes level below historical levels.

“We saw a couple of things there. One is that as we keep extending the tenure of these cat bonds there’s going to be some impact on the annual volume; as we extend the markets from three years to four years, and even four-plus years, then we’re not going to see those trades come back as frequently, so there’s some impact from that.

“There’s also been some impact from clients wanting to retain more exposure, net, and I think some of the bonds weren’t renewed because certain clients decided to spend less on reinsurance and retain more risk.

“The third impact during the second quarter was that some transactions didn’t renew because cedants had found cheaper alternatives in traditional market execution, as opposed to the capital markets. Those three themes played through and we saw less activity in the second quarter.

“We’ve definitely seen the traditional market over the past year show a greater willingness to cover or to write risks at lower margins than the capital markets, and as a result, it has had a more competitive offering in certain situations.”

Schultz stresses however that this was just one quarter’s data point and that it was too early to draw an inference or to extrapolate a trend from it.

“We would say that the pipeline of cat bonds for the second half of the year is getting stronger, so I do think that the second quarter might not be a period that anyone should be very alarmed about. It feels like activity will pick up in the second half of the year.

“Last week we closed a higher-yielding transaction from our CATstream shelf. We had a client that saw an opportunity to issue very quickly, so that transaction was completed in a matter of a few weeks, and included protection with an attachment point lower than where the vast majority of cat bonds trade.