Catastrophe bond issuance soared to $8.5 billion in the first half of 2021 and appears poised to set a record for the year as investors continue to deploy capital, new and repeat sponsors participate in the market, and rates for traditional reinsurance coverage rise. 

The market shows no signs of losing momentum, even in the face of Hurricane Ida’s multibillion-dollar losses (see related story, below). 

Based on the record first half and the continued flows of capital into the sector, last year’s record issuance of $11.02 billion may be beaten in 2021, said Brad Adderley, a Hamilton, Bermuda-based corporate partner at law firm Appleby.

Financial managers of insurance-linked securities have raised more capital to deploy for catastrophe bond strategies over the past 18 months, said Paul Schultz, Chicago-based CEO of Aon Securities, a unit of Aon PLC.

Judy Klugman, New York-based co-head of ILS at Swiss Re Capital Markets, the broker-dealer subsidiary of Swiss Re Ltd., said about $2 billion of new capital entered the ILS market in the first half of this year, which on top of maturities returning capital to investors, leaves the sector “flush with capital” and a draw for both new and repeat sponsors. 

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“More capital has entered the ILS space since Q2 2020 so it has allowed sponsors to take advantage of additional ILS protection without cannibalizing existing capacity sources,” said Cory Anger, managing director for GC Securities in New York. 

The average transaction size in the first half was $282.3 million over 30 different cat bond issuances, compared with $241.8 million over 27 transactions in the first half of 2020.

“We believe that momentum is likely to provide nice tailwinds into the second half of the year and really into 2022,” Mr. Schultz said.

“We see a defined pipeline of diverse sponsors, including insurers, public sector, reinsurers and corporates, planning to access ILS capital for risk transfer capacity in Q4 as well as during first half of 2022,” Ms. Anger said.

Six new sponsors participated in the first half, including Vermont Mutual Insurance Group, which used its Baldwin Re 2021-1 A to secure $150 million of cover for U.S. wind, earthquake, severe thunderstorm and wildfire on an indemnity trigger.

Established market participant San Antonio-based United Services Automobile Association issued four tranches of its Residential Re 2021-1, each securing $100 million in coverage for tropical cyclone; earthquake, including fire following; severe thunderstorm; winter storm; wildfire; volcanic eruption; meteorite impact; flood losses arising from automobile policies and renters policies; and other perils, on an indemnity trigger.

USAA is one of the top five sponsors in the history of the ILS market, according to Swiss Re, and has sponsored more than $8.5 billion of issuance since 1997.

The increased use of catastrophe bonds drives further usage as industry parties become more familiar with the coverage, making it a more established alternative to traditional reinsurance.

“The multiyear education regarding ILS continues to pay off for new sponsors. In each harder underwriting cycle, we see more sponsors interested in learning how to utilize ILS and ultimately implementing ILS protection,” Ms. Anger said. 

“If you were a broker, and you were advising on any form of meaningful catastrophe tower, if you weren’t talking about Cat Bonds to a corporate, to an insurance company or reinsurance company, you wouldn’t be doing your job,” said Matt Fitzgerald, managing partner, London and U.S. property, casualty and specialty, for Gallagher Re, the reinsurance unit of Arthur J. Gallagher & Co. 

In addition, reinsurance buyers sometimes are seeing cost savings by using nontraditional coverage, sources say.

Increased pricing for traditional coverage is “certainly a primary driver” of this year’s record first-half issuance, Mr. Schulz said.

Catastrophe bonds have been competitive, said Philipp Kusche, New York-based global head of ILS and capital solutions for TigerRisk Partners Inc.

“They are in fact two separate markets, and sometimes one or the other will be more or less expensive,” Ms. Klugman said. 

Catastrophe bonds “bring a better cost of capital to you at a certain point on the curve than traditional markets can offer,” Mr. Fitzgerald said.

While cedents and sponsors are important to the market, investors drive growth as well. “They are the ones putting money into the marketplace,” Mr. Adderley said. For the market to grow, “the investors have to be happy,” he said.

In a low interest rate environment, catastrophe bonds are attractive to investors because they provide returns as insurance pricing rises and are uncorrelated to other assets, Mr. Fitzgerald said.

Both 2019 and 2020 saw reduced catastrophe losses compared with 2017 and 2018, when the U.S was hit with multiple eight-figure losses, such as hurricanes Harvey, Irma and Maria in 2017.

“You tend to see investors allocating more capital after positive return years, which sets up even more foundation for an active 2022,” Mr. Schultz said.

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Hurricane Ida not expected to jar insurance-linked securities market 

Losses from Hurricane Ida, which could top $30 billion, are not expected to hit the catastrophe bond market hard and have not dented investor enthusiasm, sources say. 

“We do not believe this event has changed investor sentiment,” said Judy Klugman, New York-based co-head of ILS at Swiss Re Capital Markets, the broker-dealer subsidiary of Swiss Re Ltd.

Many investors do not feel that Ida will be a market-moving event, and capacity and pricing for catastrophe bonds are likely to be unaffected in the long term given the expected limited impact of the storm on the market, said Paul Schultz, Chicago-based CEO of Aon Securities, a unit of Aon PLC.

Short-term price changes have occurred where underlying exposures were either concentrated in the covered area or with lower layer aggregate triggers, where Ida losses may exceed deductibles, he said.

“Overall, the market has remained calm and orderly following landfall and trading has been extremely light,” Mr. Schultz said.

The catastrophe bond market’s exposure to Ida is limited, with a “handful” of per occurrence cat bonds facing potential material principal losses, Ms. Klugman said. In addition, some aggregate catastrophe bonds may be affected “with anticipated erosion due to Ida and other recent events,” she said.

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