The catastrophe bond sector has surpassed $100 billion in cumulative issuance since its inception in 1996, according to Aon Securities.
In 2009, alternative capital stood at $22 billion, and during the past decade its average rate of growth has far exceeded that of traditional reinsurance capital, Aon Securities said. Since 2016, alternative capital has remained at or near record highs, representing around $93 billion of an estimated $610 billion total reinsurance capital.
That growth has been driven by the asset class’ non-correlation with stocks and bonds. It has produced an average annual return of 6.38 percent, and 7.48 percent for 2019. Sector investor numbers have grown significantly, with orderbooks in 2019 inclusive of 23 percent more investors, on average, than orderbooks in 2015, Aon Securities said. This has allowed average allocations to decrease from $13 million to $9 million, putting less pressure on any given market.
Meanwhile, the investor base, once dominated by reinsurers and life companies, has evolved, with first then hedge funds and then dedicated ILS managers and institutions investing on behalf of pension funds increasingly prevalent. “As markets increased their level of sophistication and resources devoted to the space, ILS transitioned from being commonly perceived as an exotic alternative investment offering a large premium to a mainstay of many portfolios,” said Aon Securities. This supported the expansion from simple parametric or industry loss structures to coverages more closely resembling those found in the traditional market, it added.
Paul Schultz, CEO of Aon Securities, said: “Having endured significant tests in recent times, the sector has shown strength in adversity, proving that re/insurers and investors view ILS as being an enduring and important part of the industry. Reaching this $100bn milestone is a fantastic achievement, and we anticipate many further successes for ILS in the years to come as it expands into a greater number of geographies and perils.”
Aon Securities placed $5.5 billion in catastrophe bond notional across 11 transactions in 2018, and $3.1 billion across eight transactions in 2019.
Catastrophe bonds, Aon Securities, Paul Schultz