Login Register Subscribe
Current Issue

Catastrophe bonds hit second-quarter lull


Aon Securities, the investment banking division of Aon Benfield Group Ltd., on Friday said catastrophe bond issuance had slowed in the second quarter, with only five new cat bonds issued.

The Chicago-based company’s report, “Insurance-Linked Securities Q2 2016 Update” found that catastrophe bond issuance in the second quarter totaled $800 million across five transactions, which Aon described as a relatively low figure during a historically active quarter.

“Such contraction can be in part attributed to competition from traditional markets as well as some sponsors’ election to enter the alternative market earlier in the season,” the report said.

Aon Securities said risk transferred to capital markets investors was at a relatively higher risk level — a trend that began in late 2015 — with a weighted average risk interest spread of 8.4%, corresponding to a weighted average expected loss of 5.1%.

This was the highest average risk interest spread for a quarter seen in the catastrophe bond market in four years

U.S. named storm and earthquake perils dominated the catastrophe bond market in the second quarter, as did sponsors’ increasing preference for aggregate structures, with half of all tranches providing a form of aggregate coverage.

Meanwhile, there were 218 secondary market trades totaling $245.2 million during the period, according to the Financial Industry Regulatory Authority’s Trade Reporting and Compliance Engine, or TRACE, a decrease in trade volume of more than 32% compared with the first quarter of the year, while the dollar volume of reported trades decreased just over 20% from the first quarter.

Following a record-breaking first quarter issuance of $2.22 billion, catastrophe bond issuance for the first half of calendar year 2016 stood at $3.02 billion.

“Catastrophe bond issuance volume was down considerably in Q2, with only five new cat bonds issued during the quarter,” Aon Securities CEO Paul Schultz said in a statement. “Capital deployed across all collateralized products though was higher, reflecting the trend we have seen over the past few quarters in which growth in collateralized reinsurance significantly outpaced growth in cat bonds.”

Mr. Schultz also said that, 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,” he continued, “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.”

During the quarter, the company said, all Aon ILS indices posted gains. The U.S. Earthquake Bond index posted the greatest growth, with a return of 1.92%; while the All Bond and U.S. Hurricane Bond indices posted similar returns with 1.67% and 1.66%, respectively. The BB-rated Bond index posted a return of 1.39%.

The Aon ILS indices performed with mixed results relative to benchmarks, outperforming the three-to-five-year U.S. Treasury Notes index, and with comparable returns to the S&P 500 and the CMBS three-to-five-year Fixed Rate indices.

“The 10-year average annual return of the Aon All Bond Index, 8.56%, further produced superior returns relative to all other benchmarks,” Aon said in the release. “This demonstrates the value a diversified book of pure insurance risks can bring to long term investors’ portfolios.”