12 ILS ANALYSIS


INVESTOR DEMAND CONTINUES TO OUTSTRIP NEW ISSUANCE


2014 continues to prove that the rapidly expanding ILS market is here to stay. Paul Schultz, CEO at Aon Benfield Securities, discusses with Intelligent Insurer the trends driving the market forward and how investor demand is making the market ever more attractive to cedants.


W “We’ve reaching the market,


ith new sponsors entering the market each month, and some of the largest bonds on record it’s unsurprising


that


activity in the first half of 2014 is above expected levels.


In April four new bonds were issued: a €190 million ($259 million) European windstorm bond by Generali; a $450 million deal by Everest Re covering to North American wind and earthquake; and two tranches of coverage providing US windstorm coverage to Heritage Property and Casualty Insurance, worth $50 million and $150 million, respectively.


certainly seen a continuation of


strong issuance this season,” says Paul Schultz, CEO at Aon Benfield Securities. “While we expect the first half of every year to be active, the activity in the last four to six weeks has been even higher than usual.”


Schultz says that the increased activity is a result


of more cedants starting to use the market—in the form of repeat cedants sometimes doing bigger deals as well as first time users of this form of catastrophe protection.


This appetite for risk protection by cedants


is more than matched by investor appetite. “Another obvious trend that’s dominating the market’s behaviour is pricing—or the cost of


risk transfer capacity for clients, which


continues to be attractive vis à vis the other markets,” Schultz says.


As evidenced from Aon Benfield’s data


shown in Table 1, returns for investors have certainly decreased from the same period last year, meaning a lower cost of risk transfer for cedants. The return for the annual period ended April 2014, shown in the ‘all bonds’


-2% 0% 2% 4% 6% 8% 10%


Month 4-13 Source: Aon Benfield


Aon Aon ILS All Bond Index Aon ILS BB Index Aon ILS US EQ


Aon ILS US Hurricane


“The greatest demand in the market is for US hurricane bonds.”


segment, which refers to US property cat bonds, dropped to 8.85 percent, compared with 13.69 percent in 2013.


“Yes, returns have decreased from the same


period last year,” explains Schultz. “This is because there is a continuance of new capital coming into the market, so you have a larger capital base offering capital to clients who typically get good results. Also there’s a view that where the overall yield environment for ILS compares to the wider markets, it’s still a very attractively priced asset class.”


Schultz continues: “The secondary factor is


that the traditional reinsurance market has also adjusted its pricing, so to be efficient in any one


market you need to be aware of where the other markets are positioned.”


Coupon rates reached an all-time low in 2014, with State Farm’s $300 million US earthquake bond being fixed at 2 percent, according to ILS Advisers’ latest report into the cat bond market.


Schultz says that he expects to see more


clients entering the market as a result of these lower prices.


FIGURE 1: PERFORMANCE OF AON BENFIELD ILS INDICES


Month 7-13


Month 10-13


Month 1-14


INTELLIGENT ILS JUNE 2014


www.intelligentinsurer.com


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