Alternative capital holds 20% of NatCat reinsurance market

15 September 2014 — Mihaela CIRCU
The 12-month period ending June 30, 2014 was ground-breaking for the insurance-linked securities ("ILS") market, as shown in the seventh iteration of Aon Benfield Securities' annual Insurance-Linked Securities.

Momentum continued from the previous year as significant investor inflows continued pushing interest spreads to new lows and resulted in the highest issuance level in the market's history. Annual catastrophe bond issuance reached USD 9.4 billion, an increase of 41 percent over the prior year period.

The high volume of sidecars and catastrophe bond transactions allowed the alternative market to capture a 20 percent market share within the global catastrophe reinsurance market over the 12-month period under review. This market share was predominantly driven by catastrophe bonds and collateralized reinsurance.

"Meanwhile, in the 12-month period under review, interest spreads reached historic lows. This encouraged even more sponsors to consider ILS solutions as part of their risk transfer strategies—a record 13 new sponsors secured coverage during this time", AON Benfield Securities CEO PAUL Schultz commented.

In all, the catastrophe bond market has seen USD 60.1 billion of cumulative issuance since 1996, demonstrating its importance as a strategic and efficient risk management tool. The growth of the market has accelerated in the 12 months under review, and we expect the strong performance to continue for the remainder of 2014 and beyond.

As of June 30, 2014, USD 22.4 billion of bonds were on-risk — a new peak for the sector and an increase of USD 4.6 billion from the prior year.

Interestingly, the average duration of catastrophe bonds has increased steadily over the past three semi-annual issuance periods. However, the main driver in the market expansion is the large amount of new issuance, secured by both new and repeat sponsors.

"The record level of catastrophe bonds on risk highlights the recent expansion of the ILS market. Aon Benfield Securities forecasts that this market expansion will continue, as new issuance volumes are expected to outweigh maturities in the coming years", is shown in the report.

Significant capital continued to flow into the ILS sector, with an estimated USD 5-6 billion of new capital having entered the market over the 12 months to June 30, 2014. This brings total capital inflows to more than USD 10 billion for the last two years.

In the traditional reinsurance market, capital grew to USD 570 billion by the end of the first quarter of 2014. The record reinsurer capital levels and continually building strength from the ILS market pushed traditional margins for some

In the 12 months to June 30, 2014, 11 side-car transactions were completed, totaling USD 1.4 billion. During this period, capital was raised for new sidecars established sidecars and the renewal of existing vehicles. The transactions provided plenty of opportunities for investors looking to expand their access to risks that were not available in the catastrophe bond market. The trend away from an opportunistic market, such as that seen post-Katrina, continued, with investors accepting lower returns than seen in prior years— a consequence of benign loss activity and increased competition seen in the traditional markets.

The significant growth of collateralized reinsurance demonstrated investors' continued appetite for risks not available in the catastrophe bond market.

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