Investors Show Faith In Insurance-Linked Securities

After a lull in investing in insurance-linked securities in 2009, the market showed a sharp uptick in investment interest in 2010.

In its third annual report, Aon Benfield Securities, a subsidiary of Chicago-based insurance broker Aon Corp., said over a 12-month period ending June 30 of this year, insurance-linked securities achieved a 170 percent increase, rising from $1.7 billion and 11 transactions during the 12-month period in 2009 to $4.6 billion and 20 transactions this year.

In its "ILS Review 2010--Market Momentum" report, Aon Benfield said the investments were exceeded only by the years 2007, with $7 billion, and 2008, with $5.8 billion in insurance-linked securities issued.

The report said that as of June 30, there was a total of $12.1 billion in catastrophe bonds outstanding, up from $11.4 billion a year earlier. Since 1997, the insurance-linked securities market has seen a total of $30.9 billion of cumulative catastrophe bonds issued.

"Over the past year, the insurance-linked securities market has once again demonstrated its importance as a source of risk-transfer capacity," said Paul Schultz, president of Aon Benfield Securities, in a statement. "The market has grown and evolved in response to a changing global economic environment, maintaining its relevance to both sponsors and investors. Our analysis elaborates on these market characteristics and offers a positive outlook for the future."

Aon Benfield said according to its insurance-linked securities indices--a benchmarking tool it launched earlier this month--insurance-linked securities products provided a total investment return of 12.85 percent for the year ending June 30, 2010. This was an increase of 2.94 percent from the previous year. These results are primarily attributable to mark-to-market gains across all perils, the firm said.

The report said that despite some major catastrophes so far this year--specifically the 7.0 magnitude earthquake in Haiti, the 8.8 magnitude earthquake in Chile and the $1 billion in insured losses from February's Windstorm Xynthia across Western Europe--the disasters are "unlikely to significantly alter [insurance-linked securities] trends."

The 56-page report stated "further momentum" in the insurance-linked securities space is expected as capital continues to flow in and the pricing environment remains attractive.