6 September 2019ILS

Catastrophes since 2017 drive spike in ILS impairments

Following the hurricanes, earthquakes, wildfires, typhoons and winter storm events of 2017, 2018 and 2019, the market endured anticipated impairments of 25 notes, according to an Aon Securities annual report on the insurance-linked securities (ILS) sector.

These impairments will lead to bond losses of $1.25 billion, predicted the report, titled Alternative Capital: Strength Through Disruption. Before 2017 only seven catastrophe bond classes of notes had been impaired, the report added, with losses totalling $900 million.

These losses had a dramatic impact on the dynamics of capacity, collateral treatment, pricing and investor sentiment in the period under review, said Aon Securities.

The report revealed analysed the 12 month period ending June 30, 2019, and concluded that catastrophe bond limit on-risk had reached a record $30.3 billion, an increase of $300,000 since June 2018.

In all, $5.4 billion of catastrophe bonds, including life and health, were issued in the 12 month period, the report said.

There was $93 billion of alternative capital in the re/insurance sector at the end of June, representing a decrease of $5 billion from the previous year, mainly driven by a reduction in the collateralised reinsurance segment, it added.

It estimated the in-force industry loss warranties (ILW) limit to stand at approximately $6 billion. Capital markets investors continued to be a major driver in the ILW space, both as purchasers of ILW limit and as suppliers of ILW capacity, the report said.

In the 12 month period 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.

Paul Schultz, chief executive officer of Aon Securities, said recent losses had put the spotlight on the ILS market to a degree not seen before in the sector, describing the 12 month period assessed in the report “educational for market participants, as well as reassuring, due to impaired bonds responding as designed.”

He added: “After this period of contraction, we expect alternative capital to resume its upward growth momentum later this year and into 2020.”