Insurance linked securities are holding their own even as they have been slammed with robust catastrophe bond losses, a new Aon report has found, predicting that the sector will resume growth in 2020.

Alternative capital in the insurance/reinsurance sector was at $93 billion as of the 12 month period ending June 30,2019, the Aon Securities report found, a dip of $5 billion from the previous period. Aon said the change came from a reduction in the collateralized insurance segment.

According to Aon, $5.4 billion of catastrophe bonds (life and health included) were issued during the period it reviewed. Also, catastrophe bond limit on-risk reached a record $30.3 billion during the 12-month period ending June 30.

Aon found that the sector has taken some hits. Only 7 catastrophe bond classes of notes prior to 2017 had been impaired, with losses hitting $900 million. After the record losses from hurricanes, earthquakes, wildfires, typhoons and winter storms of 2017, 2018, and 2019 (thus far), there were anticipated impairments of 25 notes, with anticipated bond losses of about $1.25 billion.

Aon argued that the concentrated loss levels were absorbed by the market, though there was a “dramatic impact on the dynamics of capacity, collateral treatment, pricing, and investor sentiment.”

Paul Schultz, Chief Executive Officer of Aon Securities, pointed out that ILS transactions have been under intense scrutiny in the wake of historic catastrophe losses over the last three years. Importantly, he said in prepared remarks that the 12-month period Aon reviewed has been enlightening for ILS market participants, and that it points to more stable days ahead.

“The 12-month period reviewed in this report has been educational for market participants, as well as reassuring, due to impaired bonds responding as designed,” Schultz said. “After this period of contraction, we expect alternative capital to resume its upward growth momentum later this year and into 2020.”

Other report highlights:

  • In the 12 months to June 30, 2019, $2.71 billion in limit was secured through the 21 sidecar transactions that came to market, seven of which were launched by new sponsors, and 14 were renewing entities.
  • Estimated in-force ILW limit stood at approximately $6 billion, with capital markets investors continuing to be a major driver in the ILW space, both as purchasers of ILW limit and as suppliers of ILW capacity.
  • In the period under review, the Aon All Bond Index and US Hurricane Bond Index achieved returns of 4.30 percent and 2.74 percent respectively, compared to 3.12 percent and -1.13 percent, respectively in 2018.

The full report is “Alternative Capital: Strength Through Disruption.”

Source: Aon Securities

Topics Catastrophe Profit Loss Aon