Strapline


ILS Intelligence


“Investor demand remains strong in


2012, consistent with the trend seen in Q4 2011, where almost $2 billion of


ILS were brought to market across nine different sponsors.”


also thanks to concerns with the lack of available assets to back the TPR structure that meet the strict eligibility criteria. This has led to an increase in popularity for euro-denominated MTNs issued by supranationals such as the European Bank for Reconstruction and Development.


The recent flight to quality by capital market investors flocking to the


safe haven of AAA-rated government money market funds has further compounded the collateral debate, causing some of the larger Euro Government Money Market Funds to either close or to place restrictions on new subscriptions.


A BRIGHT OUTLOOK In the absence of a severe catastrophic event, index returns in 2012 are


likely to be higher than those of 2011, when the hardening of rates caused by global catastrophes, as well as the loss of the three aforementioned cat bonds, affected the gains.


Importantly, investor demand remains strong in 2012, consistent with


the trend seen in Q4 2011, where almost $2 billion of ILS were brought to market across nine different sponsors, including two new ILS entrants. Several of these bonds were upsized from their original target offerings.


This upsizing illustrated that strong investor demand was met with


additional supply, and total issuances in Q4 were almost $800 million above their original offering amounts. Nearly $1.5 billion of these transactions were exposed to US hurricane risk and nearly $1 billion utilised aggregate trigger structures.


44 | INTELLIGENT INSURER | Spring 2012


In addition to short-dated trading, several investors who had secured


new mandates for fresh capital utilised the secondary market to source bonds in Q4, and this trend is set to continue into 2012. While the heavy primary pipeline prompted many investors to budget for new issues, there was no shortage of investors willing to sell bonds and rebalance portfolios for this new capital at year end.


By the end of 2011, both sponsors and investors successfully overcame


formidable obstacles to finish the year on a high note. This sets a firm platform for the market’s continued growth, and the first quarter of 2012 is expected to be active with a strong pipeline of new deals. According to our forecasts, increases will be seen across Aon Benfield’s ILS indices during the first half of 2012, driven by coupons rather than mark-to- market gains, and we expect the secondary market to keep its resiliency at or above the 2011 trading volume.


As for the longer term outlook for ILS, it is a form of complementary capacity that is now firmly embedded in buyers’ psyches. It is both transparent and accessible, and is a form of capital that is backed by robust analytics. From Aon Benfield’s perspective, we see it as just one method of risk transfer that may be particularly suited to certain clients. However, our job as a capital advisor is to look at all forms of global capital, to see how we can structure comprehensive solutions that best meet the needs of our clients’ individual programmes.


Paul Schultz is chief executive officer of Aon Benfield Securities.


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