Great American Insurance Company Riverfront Re Ltd. ... The ABS 3-5 Year, Fixed Rate Index is calculated by BAML and tra
Insurance-Linked Securities First Quarter 2014 Update
Empower Results®
Insurance-Linked Securities 2014: First Quarter Update
First Quarter 2014 Catastrophe Bond Transaction Review As 2013 came to a close, total new catastrophe bond issuance for the trailing 12-month period was at its highest level since 2007, while total bonds outstanding at year end set a new record of USD20.3 billion. Picking up where the strong 2013 year ended, seven transactions closed during the first quarter of 2014, making it the second most active for any first quarter on record. Meanwhile, market conditions for insurance linked-securities (“ILS”) followed the historic low rates seen in 2013, as strong demand for catastrophe bonds continued among sponsors and investors. New sponsors, American Strategic Insurance Group (“ASIG”) and Great American Insurance Company (“GAIC’”), entered the market in the first quarter, along with ILS veterans State Farm, Munich Re and Chubb Group. Investors were provided with a variety of risks to choose from, including regional U.S. earthquake, regional, nationwide and North American multi-peril, Japanese earthquake, worldwide hurricane and cyclone, and U.S. health. Following the 2013 trend in broadened coverage, the vast majority of transactions that closed during the first quarter provided a form of indemnity coverage. The table below summarizes the terms of the deals that were closed during the first quarter: First Quarter 2014 Catastrophe Bond Issuance Beneficiary
Issuer
Aetna Life Insurance
Vitality Re V Limited
Series
Class Class A
Size (USD millions)
US Medical Benefits Ratio
Indemnity
60
Münchener RückversicherungsGesellschaft Aktiengesellschaft (“Munich Re“)
Queen Street IX Re Limited
Chubb Group
East Lane Re VI Ltd.
Series 2014-1
American Strategic Insurance Group
Gator Re Ltd.
Series 2014-1
Tokio Marine & Nichido Fire Insurance Co., Ltd.
Kizuna Re II Ltd.
Series 2014-1
Great American Insurance Company
Riverfront Re Ltd.
95
US/CAN HU, EQ, ST & WS
State Farm Fire and Casualty Company (“State Farm”)
Merna Re V Ltd.
300
New Madrid EQ
Total Closing During Q1
Expected Loss1
Interest Spread
BBB+
0.01%
1.75%
BB+
0.21%
2.50%
US HU & AUS CY
Multiple
Not Rated
2.92%
5.50%
Class A
270
Northeast US HU, EQ, ST & WS
Indemnity
BB+
0.88%
2.75%
Class A
200
US HU & ST
Indemnity
Not Rated
1.73%
6.50%
Class A
200
Not Rated
0.21%
2.25%
JP EQ
Indemnity Not Rated
0.57%
2.50%
Indemnity
BB-
1.34%
4.00%
Indemnity
Not Rated
0.40%
2.00%
Class B
45
1,410
Annualized modeled expected losses, with warm sea surface temperature results for hurricane risks
2
Rating
100
Source: Aon Benfield Securities, Inc. 1
Trigger
140
Series 2014-1 Class B
Covered Perils
Legend AUS − Australia CAN − Canada JP – Japan US − United States
CY − Cyclone EQ − Earthquake HU − Hurricane ST – Severe Thunderstorm WS – Winterstorm
Aon Benfield Securities
First Quarter 2014 Catastrophe Bond Transaction Review In the first quarter, Aetna Life Insurance returned to the market for its fifth issuance, Vitality Re V Limited, with USD200 million in health capacity. Queen Street Re IX Limited provides Munich Re with coverage for earthquake in the U.S. and cyclone in Australia, while Chubb Group’s East Lane Re VI Ltd. USD270 million transaction gives the insurer regional multi-peril coverage in the northeast U.S., against hurricane, earthquake, severe thunderstorm and winterstorm. Such reissuances suggest the persistent benefit sponsors see in the catastrophe bond market and its emergence as a permanent fixture of their risk transfer programs. Also in the first quarter, ASIG, a new comer to ILS, found hurricane and severe thunderstorm coverage through Gator Re Ltd. a bond which utilizes a dual structure sectioning an indemnity hurricane and severe thunderstorm trigger as per occurrence and an indemnity severe thunderstorm trigger as annual aggregate.
GAIC also came to the market with its first transaction, Riverfront Re Ltd., which provides multi-peril coverage in the U.S. and Canada. The transaction was well received by investors priced at 4.00 percent. Tokio Marine & Nichido Fire Insurance Co., Ltd. (“Tokio Marine”) successfully sponsored its second indemnity catastrophe bond, Kizuna Re II Ltd. – the first Japanese non-life earthquake bond with significant commercial and industrial exposures in Japan, which provides the insurer with USD245 million in coverage. Merna Re V Ltd. provides State Farm with USD300 million of indemnity coverage against earthquakes in the New Madrid region. The offering closed in March with an interest spread of 2.00 percent, 50 basis points lower than Merna Re IV Ltd., which marketed in the first quarter of 2013 with a similar expected loss, emphasizing the lower rate environment. The chart below shows historical catastrophe bond issuance by quarter:
Catastrophe Bond Issuance by Year 8,000 Q1
Q2
Q3
Q4
7,000
1,877 6,000
1,888
USD millions
5,000
4,000
1,621 2,393
804 1,990
3,000
232
2,095 854
2,000
2,350
3,303
742
1,000
0
300 2010
1,015 2011
1,493
1,410 670
2012
2013
2014
Source: Aon Benfield Securities, Inc.
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Insurance-Linked Securities 2014: First Quarter Update
Aon Benfield ILS Indices1 The Aon Benfield ILS Indices are calculated by Thomson Reuters using month-end price data provided by Aon Benfield Securities.
returns of 9.24 percent and 6.06 percent respectively, while the U.S. Hurricane and U.S. Earthquake Bond indices posted returns of 10.53 percent and 5.40 percent respectively.
For the first quarter of 2014, each ILS index posted an increase: the All Bond and BB-rated Bond indices gained 1.62 percent and 1.24 percent respectively, while the U.S. Hurricane Bond and U.S. Earthquake Bond indices gained 1.28 percent and 0.99 percent respectively.
The ILS indices outperformed all comparable fixed income benchmarks for the 12-month period, but underperformed the S&P500.
The ILS indices outperformed all comparable fixed income benchmarks for the quarter; however, only the All Bond index outperformed the S&P 500 equity index during the period. For each of the ILS indices, returns were lower than for the first quarter of 2013, as mark-to-market gains decreased versus a strong prior year period. For the trailing 12 months, all of the ILS indices posted gains: the Aon Benfield All Bond and BB-rated Bond indices posted
The trailing 12-month returns were lower than for the prior year period, which saw the All Bond Index outperforming all comparable fixed income indices and also the S&P500, demonstrating the value of a diversified book of catastrophe bonds. In the absence of severe catastrophic events, Aon Benfield Securities forecasts that 2014 will be another positive year for the Aon Benfield ILS Indices, as the market broadens the spectrum of available risks and expands coverage to also encompass the lower layers of sponsors’ reinsurance programs.
Index Title
Return For Quarterly Period Ended Mar 31
Return For Annual Period Ended Mar 31
Aon Benfield Ils Indices
2014
2013
2014
2013
All Bond Bloomberg Ticker (AONCILS)
1.62%
3.13%
9.24%
12.80%
BB-rated Bond Bloomberg Ticker (AONCBB)
1.24%
2.25%
6.06%
9.58%
U.S. Hurricane Bond Bloomberg Ticker (AONCUSHU)
1.28%
2.29%
10.53%
13.24%
U.S. Earthquake Bond Bloomberg Ticker (AONCUSEQ)
0.99%
2.38%
5.40%
7.33%
Benchmarks
3-5 Year U.S. Treasury Notes
0.50%
0.25%
-0.73%
2.19%
3-5 Year BB US High Yield Index
1.94%
2.07%
7.09%
10.90%
S&P 500
1.30%
10.03%
19.32%
11.41%
ABS 3-5 Year, Fixed Rate
0.98%
0.53%
0.81%
5.18%
CMBS 3-5 Year, Fixed Rate
1.14%
0.23%
1.82%
7.31%
Source: Aon Benfield Securities Inc., Bloomberg
1 The 3-5 Year U.S. Treasury Note Index is calculated by Bloomberg and simulates the performance of U.S. Treasury notes with maturities ranging from three to five years. The 3-5 Year BB Cash Pay High Yield Index is calculated by Bank of America Merrill Lynch (BAML) and tracks the performance of US dollar denominated corporate bonds with a remaining term to final maturity ranging from three to five years and are rated BB1 through BB3. Qualifying securities must have a rating of BB1 through BB3, a remaining term to final maturity ranging from 3 – 5 years, fixed coupon schedule and a minimum amount outstanding of $100 million. Fixed-to-floating rate securities are included provided they are callable within the fixed rate period and are at least one year from the last call prior to the date the bond transactions from a fixed to a floating rate security. The S&P 500 is Standard & Poor's broad-based equity index representing the performance of a broad sample of 500 leading companies in leading industries. The S&P 500 Index represents price performance only, and does not include dividend reinvestments or advisory and trading costs. The ABS 3-5 Year, Fixed Rate Index is calculated by BAML and tracks the performance of U.S. dollar denominated investment grade fixed rate asset backed securities publicly issued in the U.S. domestic market with terms ranging from three to five years. Qualifying securities must have an investment grade rating, a fixed rate coupon, at least one year remaining term to final stated maturity, a fixed coupon schedule, and an original deal size for the collateral group of at least $250 million. The CMBS 3-5 Year, Fixed Rate Index is calculated by BAML and tracks the performance of U.S. dollar denominated investment grade fixed rate commercial mortgage backed securities publicly issued in the U.S. domestic market with terms ranging from three to five years. Qualifying securities must have an investment grade rating, at least one year remaining term to final maturity, a fixed coupon schedule, and an original deal size for the collateral group of at least $250 million. The performance of an index will vary based on the characteristics of, and risks inherent in, each of the various securities which comprise the index. As such, the relative performance of an index is likely to vary, often substantially, over time. Investors cannot invest directly in indices. Past performance is no guarantee of future results.
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Aon Benfield Securities
ILS Sales and Distribution The ILS market continued to show strength as the first quarter of 2014 came to a close. Investors secured USD1.41 billion in new issuance during the period, compared to USD0.67 billion in the first quarter of 2013. New issuance demand was strong, as investors desired to redeploy capital into catastrophe bonds, and new capital continued to flow into ILS strategies. Many transactions increased in issuance size and priced at the lower end of, or below, interest spread guidance. However, even with the 110 percent year-overyear increase in issuance, new issuances did not keep pace with the USD2.4 billion of bonds that matured during Q1 2014.
at 1.75 percent – a 36 percent decline year-over-year. The ILS market’s interest in assuming non-peak perils provides a good backdrop for expansion into new peril types, as the market continues to expand its coverage.
Many of the new issuances coming to market during the quarter enabled investors to diversify portfolios into nonpeak risks. These risks included New Madrid earthquake (Merna Re V Ltd.), Japan earthquake (Kizuna Re II Ltd.), Australia cyclone (Queen Street IX Ltd.) and medical benefit reinsurance (Vitality Re V Ltd.).
To complement diversification, investors sought opportunities to increase absolute return on portfolios through sourcing high-yielding transactions in the secondary market. Investors holding an inventory of bonds demanded a premium to exit their positions, driving bonds prices higher throughout the quarter. During the quarter, transactions with relatively high coupons drew significant interest, although the primary market only provided one issuance yielding above 6.00 percent (Gator Re Ltd.) – the return target of a number of ILS funds. Given the recent high issuance volumes of low-yielding transactions, higher-yielding transactions are likely to be in demand by portfolio managers as a means to improve portfolio returns.
Investors demonstrated interest in portfolio diversification, which pushed yields to benchmark lows. Strong investor demand in Merna Re V Ltd. reduced the spread to 2.00 percent, representing a 20 percent decline compared to the first quarter of 2013, and the lowest spread for a non-investment grade bond in six years. Similarly, the investment grade-rated Class A of Vitality Re V Ltd. closed
We expect investor demand for ILS to continue to be strong into the second quarter 2014 as capital continues to flow into the market. As such, capital markets transactions should continue to look attractive to sponsors. We would anticipate investor interest in higher-yielding transactions to continue as investors search for methods to increase absolute yield on their portfolios.
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Insurance-Linked Securities 2014: First Quarter Update
An Interview with Jonathan Barnes, Senior Advisor to Securis Investment Partners Jonathan Barnes joined Securis in 2007 as Head of Non-Life Origination, subsequently overseeing the profitable growth of the firm’s private Non-Life investments from tens of millions to around USD1 billion. He relinquished the role in autumn 2013 to become Securis’ Senior Advisor.
1. You have an underwriting, broking and capital markets background. It must give you quite a perspective on the ILS space? When engaged in any contractual negotiation, I think it’s always helpful to consider the objectives of the other parties involved: whether buyer, seller or intermediary. Having some experience in each of these roles has helped me to identify transaction structures and terms that are acceptable to all parties and, equally important, identify any insuperable obstacles at an early stage. It has also given me a sincere respect for those many individuals who fulfil their respective roles with a high standard of professionalism.
3. Securis has been a manager in ILS since 2005. What has and hasn't met your expectations through the years? Whilst I always felt confident that the capital markets would become the natural provider of protection for extreme event tail-risk, I must confess that that the speed with which this has occurred in recent years has exceeded my expectations. Prior to 2005 we used to joke that there were more ILS conferences than deals. The 2004/5 Atlantic hurricane losses provided the impetus for the insurance industry to source new and more appropriate capital with which to finance these risks. The persistent low interest rate environment following the global financial crisis then motivated investors to seek-out uncorrelated alternative assets classes offering attractive returns.
2. Securis broadly participates in in the market through multiple forms of investment. Is there any area you find particularly attractive in the current market environment? Well, if we discovered a rich seam to mine, I’m not sure it would be advisable to broadcast the fact! On a more serious note, whilst cognisant of their respective strengths and weaknesses, Securis focuses more on risk-adjusted returns and is relatively indifferent to the form of an investment. As spreads across the Non-Life spectrum continue to tighten, finding attractive risk-adjusted returns becomes more demanding. I am interested in the development of the so-called ‘cat bond light’ sector, as lowering frictional costs opens access to ILS markets for new issuers seeking to transfer risk in smaller size. Also, the absence of an independent expert risk assessment or credit rating should act as a barrier to entry for investors that lack specialist ILS experience. It will be interesting to see whether this subsector continues to gain traction.
4. Do you find the ILS space gaining momentum as a true asset class with prospects? Yes, but the challenge facing all stakeholders is to grow the entire asset class. One has only to see the chasm between the quantum of economic and insured loss arising from natural catastrophe events to appreciate the enormous scope for further insurance penetration. I see this as a virtuous circle: growing the sector provides protection sellers with greater diversification which, in turn, should fuel pricing efficiency and further growth. I see the developing world as an important contributor to this process, as per capita GDP achieves the thresholds at which insurance penetration increases way more rapidly than the growth in national GDP.
5. Looking forward, where will the ILS market be in five years? I suspect it will become so deeply integrated in the wholesale market for insurance risk transfer that the distinction between differing sources of capital ceases to be immediately apparent. Indeed, this process is already well underway.
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Aon Benfield 200 E. Randolph Street Chicago, Illinois 60601 t +1.312.381.5300 f +1.312.381.0160 aonbenfield.com
Aon Benfield Securities, Inc. and Aon Benfield Securities Limited (collectively, “Aon Benfield Securities”) provide insurance and reinsurance clients with a full suite of insurance-linked securities products, including catastrophe bonds, contingent capital, sidecars, collateralized reinsurance, industry loss warranties, and derivative products. As one of the most experienced investment banking firms in this market, Aon Benfield Securities offers expert underwriting and placement of new debt and equity issues, financial and strategic advisory services, as well as a leading secondary trading desk. Aon Benfield Securities’ integration with Aon Benfield’s reinsurance operation expands its capability to provide distinctive analytics, modeling, rating agency, and other consultative services. Aon Benfield Inc., Aon Benfield Securities, Inc. and Aon Benfield Securities Limited are all wholly-owned subsidiaries of Aon plc. Securities advice, products and services described within this report are offered solely through Aon Benfield Securities, Inc. and/or Aon Benfield Securities Limited.
Aon Benfield, LLC, 2014. All rights reserved. This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon Aon Benfield’s preliminary analysis of publicly available information. The content of this document is made available on an “as is” basis, without warranty of any kind. Aon Benfield disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Aon Benfield reserves all rights to the content of this document. #14501 - 4/2014 ©
