The decline in spreads spurred activity among repeat issuers, which had transactional structures in place to enable them to quickly take advantage of the improved pricing environment. Only two new cat bond sponsors came to the market in 2009.
Secondary trading remained at average levels during Q4, as investors chose to allocate capital to new issuances rather than trading in existing ILS products.
Paul Schultz, President of Aon Benfield Securities, said: “The high spreads witnessed during the first half of the year deterred many potential new sponsors from entering the market, as traditional reinsurance solutions were considered more economical. However, with spreads improving during Q3 and Q4, those with structures already established were well placed to react to the improved conditions in the ILS market. The fourth quarter was especially active, as Aon Benfield Securities underwrote and placed three issues with a notional amount of $510 million on a currency adjusted basis. This includes a $225 million transaction transferring commercial California earthquake risk to the capital markets on an indemnity basis.”
Money market funds, which offer conservative collateral structures and are less dependent on counterparties’ credit ratings, were the most popular form of collateral management for ILS products during Q4.
The period saw continued emphasis on ILS solutions covering U.S. exposures, with price declines occurring across those covering perils in non-U.S. geographies. In 2009 as a whole, issuance for U.S. perils represented 80% of the total ILS market, followed by issuance for Japan and Western European perils.
The use of an industry index loss trigger was by far the most popular mechanism for cat bonds in 2009.
Mr. Schultz added: “In both U.S. and non-U.S. markets, improved conditions have broadened the new issuance pipeline as sponsors have sought to access capacity at increasingly competitive prices. From an investor perspective, we expect to see a trend towards the use of the collateralized reinsurance market to fill risk buckets and return profiles which are currently unavailable in the ILS market.”
Aon Benfield Securities forecasts that ILS issuance volumes will grow during 1H 2010, as approximately $2bn of transactions come off-risk and sponsors seek to replace the capacity via capital markets solutions.