Catastrophe bond market may surpass records in 2020: A.M. Best

Issuance of new catastrophe bonds could exceed the record set in 2017 if it continues at the pace set in the first-half of the year, as capital markets risk transfer continues to gain acceptance with cedants and investor appetite continues to grow.

Catastrophe bonds have been unaffected by the Covid-19 pandemic, in terms of losses, as they tend to cover named catastrophe or severe weather perils.

While volatility in the capital markets during the early weeks of the pandemic caused some accelerated trading of cat bonds and some more generalist investors to exit the space, the cat bond itself has proven robust, as prices recovered and spreads have now risen in-line with reinsurance rates and investor return expectations.

A.M. Best counts issuance of property catastrophe bonds as having reached $6.6 billion in the first-half of the year.

By our reckoning and based on data in the Artemis Deal Directory, property catastrophe bond issuance has now surpassed $7.5 billion at this point of the year.

While cat bond and related insurance-linked securities (ILS) issuance, so including health ILS, mortgage ILS and the one operational risk ILS issued so far this year, takes the total to more than $10 billion already.

Rating agency A.M. Best notes that 2017, a record year of property cat bond issuance, saw $10.3 billion of natural disaster and weather exposed cat bond securities issued.

“Issuance volume in the first half, $6.6 billion, has already surpassed all of 2019 and may be on its way to pass the $10.3 billion of 2017,” A.M. Best explained.

The company continued, “Capital market participation in the traditional P/C 144A cat bond segment continues to grow in volume, the range of perils covered, and the number of insurance company sponsors.

“Despite the impact of the COVID-19 pandemic, volume in the first half of 2020 surpassed all of 2019, increasing to approximately $6.6 billion. The increase can be attributed primarily to the need to replace about $6.2 billion of cat bonds that matured in the first half of the year.”

Market sources expect issuance of around $8 billion to $10 billion, A.M. Best says, which means the 2017 record is clearly in sight.

“This expectation is driven in part by the demand for additional reinsurance protection from primary insurers, reinsurers seeking retro cover from the cat bond market due to the tightening of retro capacity, the approximately $6.2 billion of cat bonds that matured in the first half of 2020, and the growing acceptance of the cat bond market as a way to transfer risk to capital market participants,” A.M. Best explained.

For full details of recent second-quarter 2020 cat bond and related ILS issuance, including a breakdown of deal flow by factors such as perils, triggers, expected loss, and pricing, as well as analysis of the issuance trends by month and year.

Download your free copy of Artemis’ Q2 2020 Cat Bond & ILS Market Report here.

For copies of all our catastrophe bond market reports, visit our archive page and download them all.