TUESDAY
Interview:
Paul Schultz, Aon Securities 17.10.17
Alternative thinking: the historic rise of ILS
Aon Securities has published its annual ILS report: Alternative Capital Breaks
New Boundaries. Paul Schultz, its chief executive, tells PCI Today about the key
developments during what has been a record year for ILS.
It has been a record year for insurance-linked
securities (ILS) in several ways. In the six months
to June 30, 2017, some $8.5 billion of catastrophe
bonds had been issued—far higher than even the
most bullish estimates at the start of the year, and
exceeding any annual issuance total on record.
Paul Schultz, chief executive of Aon’s
investment banking team, Aon Securities, says
that even his own forecast of around $8 billion
issuance for 2017, which was viewed by many at
the time as optimistic, had since proved to be too
conservative.
He explains that the higher-than-expected
levels of issuance had been partly because some
of the deals launched in 2017 were upsized
significantly due to strong investor demand,
including a couple that eventually exceeded the
$1 billion mark.
“The competitive pricing environment has
resulted in some issuers reconsidering their
ability to issue larger deals; there is an even
greater realisation that ILS can be a very costeffective
form of protection,” Schultz says.
He explains that pricing in the cat bond
market has softened in the past 12 months and
especially since the third quarter of 2016.
“Relative to other forms of coverage, prices
have decreased and that has also boosted the
growth of this market in late 2016 and into
2017,” he says.
Despite this, he still characterises the ILS
market as complementary to so-called traditional
reinsurance.
“We advise clients across the scope of
execution, but we do not see one as displacing
the other,” he says. “ILS is competitive and there
is a great amount of capital available, but this is
also a market leveraged by reinsurers, so it is not
as simple as seeing it as straight competition.”
Capital entering
Schultz explains that increased investor interest
in this field has been driven by capital-raising
Paul Schultz
“Investors understand that the
cyclical nature of the industry
means that to maximise their
returns, they have to be in the
market long term.”
efforts in this sector that often started some two
years ago.
“As managers saw rates stabilise in the ILS
sector, there was a real push to raise money and
those efforts are now coming to fruition,” he says.
“There is a natural lag between marketing
efforts and capital inflows into the sector, but we
are now seeing new investors as well as an increase
in allocation from existing investors. Given that we
saw deals in the second quarter of 2017 pricing as
aggressively as in the first quarter, we believe that
there is still plenty of capital on the sidelines waiting
for an opportune time to come in.”
He stresses that many investors are entering
the sector for the long term, valuing the noncorrelated
nature of ILS as an asset class, but
also aware of the type of events that could lead
to losses on the bonds.
“Investors understand that the cyclical nature of
the industry means that to maximise their returns,
they have to be in the market long term. If they pulled
out after an event, they would lose the opportunity to
earn better returns. That leads us to believe that most
investors will still be there post-loss,” Schultz says.
He stresses that insurers and reinsurers are
increasingly using ILS as a tool to help them
manage risk, and their own cost of capital, in a
very dynamic way.
“Alternative capital is relevant to both insurers
and reinsurers. Given where capital is being
priced, this can be an efficient way of managing
a balance sheet. It is a strategic tool that helps
re/insurers leverage their capital, manage their
balance sheets and help accelerate growth.
“Re/insurers have moved past the idea of
this being competing capital and they see it
as complementary to what they do. They are
looking for ways to harness what is available.”
Schultz says that the annual ILS report
outlines that both returns and relative returns
in ILS mean that it remains a very attractive
place to deploy capital. This is also a trend that is
unlikely to change overnight.
“We are very bullish about this sector, and our
annual report reflects that view in the trends and
discussion points it highlights,” he says. n
Paul Schultz is chief executive of Aon Securities. He
can be contacted at: paul.schultz@aonbenfield.com
www.intelligentinsurer.com | www.bermudareinsurancemagazine.com DAY 3: Tuesday October 17 2017 | PCI TODAY | 3