Catastrophe bond issuance slowed during second quarter of 2016: Aon Securities

Following a record breaking first quarter issuance of US$2.22 billion, catastrophe bond issuance for the second quarter of 2016 stood at US$800 across five transactions – a relatively low figure during a historically active quarter, Aon Securities said on Thursday.

“Such contraction can be in part attributed to competition from traditional markets as well as some sponsors’ election to enter the alternative market earlier in the season,” Aon Securities, the investment banking division of global reinsurance intermediary and capital advisor Aon Benfield, said in its report titled Insurance-Linked Securities Q2 2016 Update. “The impact of the light issuance was exaggerated by the significant amount of catastrophe bonds maturing in the quarter, with US$2.9 billion in limit coming off-risk.”

Named storms and earthquakes in the United States dominated the cat bond market during the second quarter, with Queen Street XII Re dac the only bond to include a non-U.S. peril, the report said. Also dominating the market was “sponsors’ increasing preference for aggregate structures, with half of all tranches providing a form of aggregate coverage,” Aon Benfield added in a press release.

Meanwhile, according to the Financial Industry Regulatory Authority’s Trade Reporting and Compliance Engine, there were 218 secondary market trades totalling US$245.23 million during the period – a decrease in trade volume of more than 32% compared to Q1 2016, while the dollar volume of reported trades decreased just over 20 percent from Q1 2016.

Risk transferred to capital markets investors was also at a relatively higher risk level – a trend that began in late 2015 – with a weighted average risk interest spread of 8.40%, corresponding to a weighted average expected loss of 5.05%. “This figure represented the highest average risk interest spread for a quarter seen in the catastrophe bond market in four years,” the release noted.

Paul Schultz, chief executive officer of Aon Securities, said that capital deployed across all collateralized products was higher, “reflecting the trend we have seen over the past few quarters in which growth in collateralized reinsurance significantly outpaced growth in cat bonds. Given lower primary issuance in cat bonds, it is also not surprising that secondary trading levels in the quarter were lower in a quarter-on-quarter comparison.”

Looking ahead, while the primary market is not typically as active during the third quarter, Aon Securities said that it does expect an active second half of 2016.

Aon Securities reported in January that total cat bond issuance for 2015 reached US$6.9 billion, down from US$8.3 billion in 2014.