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Aon Benfield Report: Cat Bonds Yielded Improved Returns in Q1

Source: Aon

Posted on 22 Apr 2010

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Aon Benfield Securities, the investment banking division of Aon Benfield, a premier world reinsurance intermediary and capital advisor, realeased its quarterly report on the Insurance-Linked Securities market, which reveals that catastrophe bonds provided significantly increased returns for investors during the first three months of the year.

Insurance-Linked Securities – First Quarter Update 2010 highlights that returns for the three months to March 31 averaged 3.4% across all ILS products, compared to 0.95% in the year ago period.

Furthermore, for the 12 months ended March 31, investor returns surpassed 13% – significantly greater than the 2.6% seen in the 12 month period to March 31 2009.

While ILS returns were less than the gains witnessed in the benchmark S&P 500 index over the 3-month and 12-month timeframes, the cumulative returns for ILS since January 2008 have exceeded other benchmark indices.

Paul Schultz, President of Aon Benfield Securities, said: “With issuance low in the first quarter, investors looked to the secondary market to grow their portfolios and manage inflows. This demand for bonds continued to push prices to levels unseen in previous years. Towards the end of the quarter, investors gained an optimistic view of the forward calendar, and the tide shifted to a more balanced market with investors looking to rebalance portfolios and release capital for new deals. Short-dated bonds exposed to U.S. Wind traded quite actively for this reason.”

Two ILS transactions came to market during Q1 with a total issuance value of USD300m. The conservative collateral standards developed in the ILS market in early 2009 are still being utilized, with both transactions featuring U.S. Treasury Money Market Fund collateral.

According to Aon Benfield Securities data, the total value of catastrophe bonds maturing during 2010 will approach USD5bn. Investors will be seeking to purchase new issues to replace these maturities, which will maintain liquidity in the ILS market.

Mr. Schultz added: “This primary issuance will help to drive secondary trading, as investors balance existing portfolios and attempt to grow those portfolios.”

Aon Benfield Securities forecasts $5-6 billion of new ILS issuance during 2010.

Aon Benfield Securities is the marketing name for the broker-dealer business of Aon Corporation, which operates principally through Aon Corporation's indirect, wholly-owned subsidiaries Aon Benfield Securities, Inc. in the U.S. and Aon Benfield Securities Limited in the U.K.