Insurance-Linked Securities Report 2008 - Aon

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Insurance-Linked Securities 2008 12 The Results AON CAT BOND INDICES (June 30, 2008) Twelve Months Ended Six Months Ended CAT BOND SECTOR 6/30/2008 6/30/2007 6/30/2008 6/30/2007 Asia Pacific 8.07% 10.51% 3.02% 5.64% Europe 9.09% 11.35% 3.87% 7.46% Multi-peril 9.91% 18.80% 3.07% 8.86% NA Earthquake 9.37% 11.01% 3.95% 6.28% NA Wind 11.87% 17.68% 3.20% 7.45% Investment Grade 3.85% 7.61% 0.08% 4.40% Non-Investment Grade 11.69% 15.33% 4.12% 7.64% ALL CAT BOND SECTORS 10.07% 14.51% 3.32% 7.29% BENCHMARKS 3-5 Year US Treasury Notes 10.67% 5.39% 2.28% 1.54% 3 Year US Corporate BB+ 6.46% 6.71% 3.96% 2.69% S&P 500 -14.04% 20.59% -11.91% 7.07% As a whole, catastrophe bonds provided a total return of 10.07 percent for the year ending June 30, 2008, down from 14.51 percent in the previous year. The prior period represented the highest returns on record, thanks to a near tripling of cat bond issuance in 2006 at substantially wider spreads. Evaluating each sector individually, the Indices’ returns for the 2008 period were lower in all cases than those observed in the 2007 period. These lower returns can be attributed to a combination of factors: • A softening reinsurance market. The lower cost of transferring risk in the traditional market directly influences costs in the cat bond market. • More investor money flowing into the sector. This has driven down returns on new issues. Aon Capital Markets has experienced an increase in investors’ order sizes. This, combined with the opening of several new funds, has added capital to the market. • The absence of major catastrophes resulting in large insured losses. The 12-month period ending June 30, 2008 represents the second consecutive year without a major loss to the reinsurance industry. Historically, the absence of these events has reduced both reinsurance costs and ILS returns.
AON CAT BOND INDICES BY SECTOR (Years ending June 30) 20.00% 18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Asia Pacific Asia/Pacific 2005 NA Earthquake Europe 2006 Europe Multi-peril 2007 NA Earthquake NA Wind 2008 Multi-peril NA Wind All ILS Sectors Aon Capital Markets In the recent period, Aon Cat Bond Indices were greatest for North American Wind structures, followed by Multi-peril, North American Earthquake, Europe and Asia Pacific respectively. The returns follow the relationship between expected losses and rates in the insurance industry as a whole—naturally, one demands greater compensation for assuming the risk of larger or more probable insured losses. In the latest 12-month period, the multi-peril issuances were impacted by an increased supply of multi-peril bonds, which led secondary market prices down. Interestingly, issuance in 2008 exhibited a weighted average expected loss of 1.50 percent, as compared to 1.35 percent in 2007. Further, the number of tranches issued with expected loss less than 2 percent in the twelve months ended June 30, 2008 declined to 57 percent from 69 percent in 2007. As the Indices demonstrate, returns declined between these two periods despite an increase in average expected loss. Although the reasons behind this unexpected result remain anecdotal, it seems the effects of a softening reinsurance market and more demand for cat bond investments outweighed investors’ need for greater return with increasing risk. Structural innovation can increase returns as investors require a premium to compensate for additional analysis and a perceived increase in risk. Investors reacted to cat bond innovation in the past year with discipline, which moderated the otherwise expected volatility. One such transaction—Newton Re 2008—succeeded as investors were willing to accept the sponsor’s analysis in exchange for additional transparency throughout the process and ongoing validation by a modeling firm. Despite investors’ clear preference for the use of an independent modeling firm, innovation combined with market discipline in the form of transparency and structure can be expected to continue. 13
Page 1 and 2: Insurance-Linked Securities 2008 In
Page 3 and 4: Foreword I am pleased to present th
Page 5 and 6: $ MM Aon Capital Markets Review of
Page 7 and 8: While transaction volumes have fall
Page 9 and 10: CATASTROPHE BOND ISSUANCE BY LOSS T
Page 11: New Insight into Catastrophe Bond M
Page 15 and 16: Indemnity Triggers Reach New Height
Page 17 and 18: • Longer recovery. Since indemnit
Page 19 and 20: The Buy Side A review of the ILS in
Page 21 and 22: The ILS Market: Beyond Cat Bonds As
Page 23 and 24: Just-in-Case Capital As a prearrang
Page 25 and 26: Aon Capital Markets • Repurchase
Page 27 and 28: Continued Innovation Options and fu
Page 29 and 30: Aon Capital Markets CME Group devel
Page 31 and 32: Aon Capital Markets Despite some gr
Page 33 and 34: Appendix I Catastrophe bond issuanc
Page 35 and 36: CATASTROPHE BOND ISSUANCE BY YEAR (
Page 37 and 38: CATASTROPHE BOND ISSUANCE BY TRIGGE
Page 39 and 40: Appendix II ILS market transaction
Page 41 and 42: SUMMARY OF CATASTROPHE BONDS - 1997
Page 49 and 50: SUMMARY OF SIDECAR ISSUANCE Aon Cap
Page 52: 200 E. Randolph Street, Chicago, Il

Insurance-Linked Securities Report 2008 - Aon

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