The ILS Glass Remains Half Full

The outlook for catastrophe bonds, industry-loss warranties (ILW) and other forms of insurance linked securities (ILS) remains “strong” even though many sponsors have remained on the sidelines, according to a new report from Aon Benfield.

“Considering market drivers as well as comparatively lower volume in the first quarter, conditions are prime for increased ILS issuance in the remainder of the year,” says the firm’s Insurance Linked Securities First Quarter Update. “A trend toward lower expected loss transactions may result in pressure on what investors might consider minimum pricing.”

The first quarter of the year only counted two transactions for a total of $300 million; Hartford’s $180 million renewal of Foundation Re and the $120 million expansion of Swiss Re’s Successor bond series.

The quarter also did not include any “spillover transactions, ” or deals that were attempted but not closed in the prior quarter.

Overall, issuance in the first quarter of 2010 was nearly half (52 percent) of the $575 million of structures completed in the first three months of 2009.

But despite the lack of issuance, Aon Benfield argues that investor interest will eventually convince sponsors back into the market for the remainder of the year.

Demand is being fueled by secondary market investors, according to the report, adding that the spread for BB rated U.S. Multi-Peril bonds in the first quarter was 6.66 percent on a weighted average expected loss of 1.33 percent.

That compares to a discount margin of 8.89 percent for an expected loss of 1.35 percent in the fourth quarter of 2009.

“[P]rimary issuance will drive secondary trading, as investors balance existing portfolios and attempt to grow those portfolios in the absence of primary issuance,” the report says. “Aon Benfield Securities anticipates $5-6 billion of new issuance over the calendar year.”

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