Following record catastrophe bond issuance in 2017, and the impact of Hurricanes Harvey, Irma, Maria, the insurance-linked securities sector could have had a challenging time maintaining its momentum, writes Aon.
However, as outlined in Aon Securities’ recently-issued ILS 2018 annual report – which analyses trends in the sector for the 12 months to June 30 – the market remained highly robust and even surpassed previous highs in several areas.
The report reveals that catastrophe bonds in the 12 months ending June 30, 2018, recorded a strong issuance volume of $9.7bn. This represented a decrease of $1.6bn over the preceding period, but that should not be confused with a lacklustre performance.
Contributing to the strong period, were not only repeat sponsors looking to renew maturing bonds, but also new sponsors testing the capital markets for the first time. In addition, the capital markets welcomed new perils from new geographies providing diversification to the broader market. The catastrophe events at the end of 2017 brought increased attention and concern over ILS-related trapped collateral, ILS manager ability to “reload” at renewals, and the pricing environment. The volume of transactions remained high while catastrophe bonds continued to both upsize and price at the low end of, if not further below, initial guidance.
With both supply and demand remaining strong, total outstanding volume of the market reached its highest level at $30bn as at June 30, 2018. While the third and fourth quarters of 2017 saw relatively modest issuance volume, the real driver of the trailing 12-month period was a fairly even combination of the first and second quarters of 2018.
The record first quarter 2018 issuance of $3.6bn was followed by a near-record second quarter, which brought an additional $4bn of catastrophe bonds to market.
Aiding in the strong first quarter was the largest ever sovereign risk transfer and the second largest issuance in the history of the ILS market at $1.4bn, facilitated by the World Bank on behalf of the Pacific Alliance countries.
While $5.5 billion of catastrophe bonds reached maturity since the quarter ending June 2017 through the quarter ending June 30, 2018, the supply once again outpaced the outgoing maturities. In each of the last four quarters, new issuance volume easily replaced the next cycle of maturing catastrophe bonds, with a positive influx of $4.2bn in volume.
The 12-month period in review is most noted for the resiliency demonstrated by the investment community as investors reloaded capital bases following the catastrophic events at the tail end of 2017.
Almost immediately following the 2017 hurricane events and during the active wildfire events, new transactions were launched into the market with the catastrophe bond sector seeing approximately $1.4bn of initial issuance activity immediately following Harvey, Irma, and Maria (HIM).
The first issuance post-HIM (Galileo Re Ltd 2017-1), expanded coverage from its prior transactions, receiving broad investor interest, while demonstrating the resiliency of the market post-event. The final transaction of 2017 (Tailwind Re Ltd 2017-1) was broadly syndicated, upsized from $300mn to $400mn, and each class of notes priced below initial guidance.
Bermuda continued to be the special purpose insurer (SPI) preferred domicile for the 12-month period, as 19 issuances used the jurisdiction, with the Cayman Islands accounting for five and Ireland two of the 29 new issues. New legislation passed in the United Kingdom helped two ILS transactions come to market.
Overall, strong 2018 issuance has allowed alternative capital to grow by more than $9bn to a total of $98bn, representing overall increase of 10.2 percent. This growth came despite the third and fourth quarter events of 2017. However, the period of growth also came with new structural features, risk profiles, perils, and sponsors.
To view the full Aon Securities ILS 2018 annual report, visit the link http://bit.ly/ils-annual-2018