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ILS in the spotlight after large catastrophe losses

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Global catastrophe bond issuance contracted in the year to June 30 as costly storms in the US, Mexico earthquakes, Japan’s typhoon and California wildfires triggered concern over the pricing environment, a new report from Aon finds.

Aon found catastrophe bond issuance contracted to $US5.4 billion ($7.92 billion), including life and health, a decrease of $US4.3 billion ($6.31 billion) from a year earlier, according to the twelfth edition of Aon Securities’ annual Insurance-Linked Securities (ILS) report.

The ILS market has proven to be resilient in 2019 with continued support for new issuance and growth poised to resume following the plateau in 2018, the report says.

Following the catastrophe events of 2017 and 2018, the market anticipated impairments of 25 notes, leading to $US1.25 billion ($1.83 billion) in anticipated bond losses. Prior to 2017, only seven catastrophe bond classes of notes had been impaired.

“In the wake of the recent losses, the suite of ILS transactions and the mechanisms by which they respond have been under the spotlight to a degree not seen before in the sector,” Aon Securities CEO Paul Schultz said.

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

The concentrated level of loss was digested by the market with a “dramatic impact on the dynamics of capacity, collateral treatment, pricing, and investor sentiment,” the report says, adding that the challenging year had been “reassuring” due to impaired bonds responding as designed.

“The resulting trapped collateral and loss development from these (catastrophe) events created a more cautious investor base that shifted some capital to more liquid investments, such as catastrophe bonds,” the report says.

“Investors have been deliberate and taken more considered time to place orders during marketing than we have seen historically.”

Alternative capital in the re/insurance sector stood at $US93 billion ($136.43 billion) – a decrease of $US5 billion ($7.34 billion) from the preceding period.