Aon Securities report claims low Q2 2016 activity for ILS market
Aon Securities has published its latest report on the insurance-linked securities (ILS) sector, looking at activity in the second quarter of this year.
The report, ‘Insurance-Linked Securities Q2 2016 update’, reveals that catastrophe bond issuance in the second quarter was at $800 million across five transactions, which is a relatively low amount during a historically active quarter for issuance.
According to the report risk transferred to capital markets investors was at a relatively higher risk level, a trend that started in the last quarter of 2015 – with a weighted average risk interest spread of 8.4 percent, corresponding to a weighted average expected loss of 5.05 percent. This number represented the highest average risk interest spread for a quarter seen in the catastrophe bond market in four years.
The US storm and earthquake monopolised the catastrophe bond market in the quarter, as did sponsors’ increasing preference for aggregate structures, with half of all tranches, providing a form of aggregate coverage.
There were 218 secondary market trades earning $245.23 million during the period – a drop in trade volume of over 32 percent compared to the first quarter of 2016, while the dollar volume of reported trades dropped to just above 20 percent from the first quarter of 2016, according to FINRA’s trade reporting and compliance engine.
Catastrophe bond issuance for the first half of the year stood at $3.02 billion, following what Aon Securities described as 'record-breaking' first quarter issuance of $2.22 billion.
“Catastrophe bond issuance volume was down considerably in the second quarter, with only five new cat bonds issued during the quarter,” said Paul Schultz, chief executive officer of Aon Securities.
“Capital deployed across all collateralised products though was higher, reflecting the trend we have seen over the past few quarters in which growth in collateralised reinsurance significantly outpaced growth in cat bonds.
“Given lower primary issuance in cat bonds it is also not surprising that secondary trading levels in the quarter were lower in a quarter-on-quarter comparison.
“Looking ahead, and while the primary market is not typically as active during the third quarter, our firm does expect an active second half of 2016.
“Many investors have capital to deploy which should continue to lead to further secondary price increases and a relative improvement in attractiveness of the efficiency in the cat bond market.”