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ILS investment returns continue to outperform, according to Aon insurance-linked securities report

ILS investment returns continue to outperform, according to Aon insurance-linked securities report

Annual study reveals that Aon ILS Indices beat the S&P 500 and most fixed income securities

Aon Securities, the investment banking division of global reinsurance intermediary and capital advisor Aon Benfield, today launches its annual report on the insurance-linked securities (ILS) sector, which analyzes the key trends witnessed in the 12 months to June 30, 2016, and also provides an overview of related markets and re/insurance mergers and acquisitions activity.

The report, Alternative Markets Find Growth Through Innovation, reveals that all Aon ILS Indices posted positive results for the period.  The Aon All Bond and BB-rated Bond Indices posted gains of 6.84 percent and 5.34 percent, respectively, while the U.S. Hurricane and U.S. Earthquake Bond Indices returned 7.73 percent and 4.85 percent, respectively.

The Aon All Bond Index outperformed relative to the S&P 500 Index and most comparable fixed income benchmarks, except the 3-5 year BB U.S. High Yield Index, which returned 6.93 percent during the period under review. Five-year average returns for The Aon All Bond Index stood at 7.26 percent, while 10-year average returns reached 8.56 percent.

The Aon Securities study further highlights that 24 catastrophe bond transactions closed during the period, with a total limit of USD5.2bn – a decrease on the prior year period (USD7.0bn), largely due to significantly lower issuance volumes during the first half of 2016, as issuance volumes during the second half of 2015 were relatively flat on a year-over-year basis.

US exposures continued to dominate the catastrophe bond market, with 18 of the 24 transactions comprising US risk in some capacity. On a notional basis, this represented 83 percent of the period’s issuance, compared to 86 percent in the prior year period.  Three catastrophe bonds closed covering property risks in Europe, and three insurers sought coverage for Japan risks with catastrophe bonds, securing USD720m total limit. In addition, one extreme mortality bond was brought to market, covering Australia, Canada and UK risks.

Meanwhile, five quota share sidecars were launched during the 12 months, with a capacity totaling USD1.1bn for the four sidecars that disclosed their sizes.

Paul Schultz, Chief Executive Officer of Aon Securities, said: “During the 12-month period under review we saw a continued increase in alternative capital in the reinsurance sector. However, continuing a recent trend, the capital is being increasingly deployed in the collateralized reinsurance space rather than in the form of catastrophe bonds, whose overall lower issuance volumes were driven by a number of factors including competition from traditional markets and longer coverage periods, both of which result in some cedents renewing capacity less frequently, and certain cedents increasing their risk retentions.”

From an M&A perspective, while the year-over-year volume of transactions was relatively similar during the period, the average deal size decreased meaningfully as many of the most likely acquirers were focused on the integration of previous transactions. M&A conditions still remain favorable for deals, as long-term trends towards consolidation in the insurance and reinsurance industries continue.

To view the full Insurance-Linked Securities 2016 annual study, please follow the link:

For a film of Paul Schultz discussing the key findings of the report, please follow the link:

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