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Cat bond market buoyant as insurance prices rise

cat bond

New issuance of catastrophe bonds hit a record $8.5 billion in the first half of 2021, driven by additional capital inflows into the sector and new sponsors drawn to the fresh capital.

The first half also had a significant number of maturities, which returned capital to investors for redeployment in the sector, sources say.

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

“What’s really driving the market is the fact that (insurance-linked securities) managers have been raising more capital to deploy for catastrophe bonds strategies over the past 18 months,” said Paul Schultz, Chicago-based CEO of Aon Securities, a unit of Aon PLC.

“We couldn’t have reached that $8.5 billion if we didn’t have that $2 billion of new capital inflow. That is on top of maturities which returned capital to investors,” said Judy Klugman, New York-based co-head of ILS at Swiss Re Capital Markets, the broker-dealer subsidiary of Swiss Re Ltd.  

Ms. Klugman added the sector was “flush with capital,” attracting new sponsors as well as repeat players.

Among the new sponsors was Vermont Mutual Insurance Group, with its Baldwin Re 2021-1 A issue, which secured $150 million of cover for U.S. wind, earthquake, severe thunderstorm and wildfire on an indemnity trigger.

Hardening conditions in insurance and reinsurance markets have made catastrophe bonds more attractive for companies seeking reinsurance coverage.

The pricing environment has been a leading factor in driving the catastrophe bond market, according to Philipp Kusche, New York-based global head of ILS and Capital Solutions for TigerRisk Partners Inc.

“Catastrophe bonds have been attractive over the last eight months and have been competitive against other options people had on the traditional reinsurance side,” Mr. Kusche said.

Cost will always be a factor in a sponsor’s decision, and prices vary between traditional reinsurance and ILS coverage, Ms. Klugman said.

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

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

“At different times in the cycle, the different markets – maybe ILS – are going to lead in terms of pricing. We happen to be at a point in the cycle where ILS is leading the traditional market, and I think ILS will continue to be more competitive than traditional reinsurance going into 2022,” he said.

The market, on a relative basis, is a bit more attractive to cedents, drawing new and repeat sponsors, who are in some cases closing larger transactions, Mr. Schultz said.

One of those is San Antonio-based United Services Automobile Association, which 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.

Expectations are for a continued robust catastrophe bond market.

“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 have high expectations for the fourth quarter new issuance,” Ms. Klugman said, adding that the third quarter is typically slow for the ILS market.

“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.

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.