Aon Benfield Securities, the investment banking division of global reinsurance intermediary and capital advisor Aon Benfield, has issued its annual report on the insurance-linked securities (ILS) sector, which analyses the key trends witnessed in the 12 months to June 30, 2014.

The report, Capital Revolution—Alternative Markets Fuel Dynamic Environment, reveals that annual catastrophe bond issuance reached a record $9.4 billion – an increase of 41 percent over the prior year period.

The report notes that the “high volume of catastrophe bonds coupled with 11 sidecar transactions totaling $1.4 billion, and collateralized reinsurance vehicles, allowed alternative capital to capture approximately a 20 percent market share of property catastrophe reinsurance volume during the period under review.”

Several records were set during the 12 months, including the highest ever Q2 catastrophe bond issuance of $4.5 billion across 12 transactions. First half issuance also reached new heights with $5.9 billion of transactions brought to market – exceeding the prior year period by almost 50 percent (1H 2013: $4.0 billion).

As of June 30, 2014, total catastrophe bonds outstanding remained at a record high, with $22.4 billion of bonds on-risk – an increase of $4.6 billion from the previous year.

According to the report, “a total of 24 catastrophe bonds covering U.S. perils, and five with Europe exposures were issued. Four catastrophe bonds covering Japan perils were brought to market, compared to none in the prior year, proving the strong and increased interest in the use of the capital markets from Japanese sponsors. Seventy percent of property catastrophe bonds utilized indemnity triggers covering regions such as Australia, Europe, Japan and North America.

“An estimated $5-6 billion of new capital flowed into the sector during the 12 months, bringing total capital inflows to more than $10 billion over the past two years.

“Meanwhile, market pricing conditions for ILS products continued to decline to attain historical lows, with sponsors benefitting from reductions of 20 percent or higher as investor demand kept pace with increased supply, allowing sponsors to expand coverage at competitive rates.”

Aon Benfield Securities CEO Paul Schultz commented: “The 12-month period under review was one of the strongest ever for the ILS and wider alternative capital markets. Sponsors received improved terms including increases in catastrophe bond maturity periods and a continued decrease in interest spreads to historical lows.

“Improvements in both pricing and terms and conditions also brought a record number of new sponsors to the market. The average duration of catastrophe bonds has increased steadily over the past three semi-annual issuance periods, but the main driver in the market expansion is the large amount of new issuance driven by highly favorable pricing conditions.”

The report concluded that on an annual basis, through June 30, 2014 “all Aon Benfield ILS Indices posted gains. The Aon Benfield All Bond and BB-rated Bond Indices posted returns of 7.74 percent and 4.99 percent, respectively. The U.S. Hurricane and U.S. Earthquake Bond Indices returned 8.94 percent and 4.33 percent, respectively.

“Each of the Aon Benfield ILS Indices outperformed most of the comparable fixed income benchmarks; the 3-5 Year BB High Yield Index and the S&P 500 index, however, produced superior returns.”

Source: Aon Benfield Securities