The catastrophe bond market saw robust new issuance in the first half of 2020, and observers expect the fourth quarter will see more bonds issued.
The relatively long history of the financial instruments compared with some other insurance-linked securities and the bonds’ noncorrelation with other financial markets have led to increased interest in a volatile year for investment markets, experts say.
Meanwhile, COVID-19 did little to dent the market, which paused only briefly after the pandemic hit in March before resuming activities.
There was $2.75 billion of property catastrophe bond limit placed in the second quarter of 2020 and a record $3.76 million issued in the first quarter, according to an Aon Securities report issued in late July. The midyear 2020 total is already higher than the $5.38 billion issued in all of 2019.
“The pipeline going into the rest of the year looks strong as well,” said Paul Schultz, Chicago-based CEO of Aon Securities, a unit of Aon PLC.
Catastrophe bonds are “well-positioned in a reinsurance market that is going through some repricing and re-underwriting,” Mr. Schultz said.
Reinsurance and retrocessional markets are seeing capacity constraints and a tightening of terms and conditions, Mr. Schultz noted. “That’s why we’re optimistic for future issuance,” he said.
The cat bond market is “very healthy,” said Jeff Mohrenweiser, senior director at Fitch Ratings Inc. in Chicago. “There’s a lot of issuance, and there’s more in the pipeline for the rest of the year.”
As a percentage of total assets under management, Mr. Schultz said cat bonds have increased their share over the past few years at the expense of collateralized reinsurance due to pricing and performance. “Some of the product mix has changed,” he said.
The fourth quarter is likely to be more active than the third, historically the slowest quarter for issuance, Mr. Mohrenweiser said. “Nobody really issues a catastrophe bond during the catastrophe season,” he said, noting this has been an especially active year for named storms.
The hurricane season can affect market activities, said Perry Green, director, institutional business development at reinsurance broker TigerRisk Partners Inc. in New York.
“If 2020 winds up to be a clean year, I think you’ll see additional inflows” of capital into the alternative capital and insurance linked-securities sector. Should 2020 “wind up to be a multiple-loss year again,” it could hamper the deployment of capital, he said.
This year’s issuance has largely featured investors familiar to the catastrophe bond market, Mr. Mohrenweiser said.
“As is typical when market conditions become more challenging, many of the 2020 structures have focused on previously accepted structures,” said Cory Anger, managing director, GC Securities, a unit of Guy Carpenter & Co. LLC in New York.
This year’s second quarter saw the issuance of Everglades Re II Ltd. 2020-2 from Citizens Property Insurance Corp., a nonprofit homeowners insurer in Tallahassee, Florida, a $110 million bond covering Florida named storm perils, and the latest in a series that also included Everglades Re II 2018-1, which provided $250 million in U.S wind coverage.
New York City’s Metropolitan Transportation Authority also returned to the capital markets in the second quarter with MetroCat Re Ltd. 2020-1, covering storm surge and earthquake. The MTA’s MetroCat Re Ltd. 2013-1 was its first foray into the markets after large losses from Superstorm Sandy in 2012.
The catastrophe bond market overall is dominated by U.S wind perils, Mr. Mohrenweiser said, accounting for more than half of the value and even as much as 60% to 70% when counting multiperil bonds that include U.S wind.
After three years of heavy losses due to hurricanes, wildfires, convective storms and other perils, investors in 2020 are looking for clearly structured bonds from cedents with strong track records, said Maren Josefs, a director at S&P Global Inc. in London.
Investors are “being more selective and have shifted allocations to sponsors and fund managers with the best track record, with good modeling capability, clear underwriting strategies, and strong reserving practices and governance,” Ms. Josefs said.
“We are seeing investors showing preferences for robust structures, for well-modeled named peril bonds,” said Quentin Perrot, vice president at Willis Capital Markets and Advisory in London.
New issuance in the catastrophe bond market shut down for a few weeks in the spring after the COVID-19 pandemic hit but soon resumed, Ms. Josefs said.
As fallout from the pandemic roiled markets, the noncorrelated nature of the insurance-linked securities market, compared with other investment instruments, allowed investors to seize short-term opportunities by trading out of cat bonds, which had held their value, she said.
“The diversification of insurance-linked securities really showed up on the catastrophe bond side,” Ms. Josefs said. “Investors were able to trade out of their positions to make capital available to invest in other short-term opportunities.”
Insurance-linked securities’ exposure to pandemic-related losses vary by instrument, said Ms. Anger of GC Securities.
The market for 144A catastrophe bonds — a type of unregistered equity offering not listed on a U.S. securities exchange — has had little exposure to COVID-19-related losses with the exception of the World Bank’s Pandemic Emergency Financing catastrophe bond, Ms. Anger said. Because of the named-peril nature of 144A catastrophe bonds, COVID-19-related losses have not been a concern.
For the sidecar and collateralized reinsurance segments of the insurance-linked securities market, investors could face COVID-19-related losses because those risk transfer contracts typically follow the fortunes of the underlying policies coverages, she said.
