Busy Q2 of cat bond issuance expected, despite Covid-19 lull: Aon

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The second-quarter of 2020 is expected to see strong issuance of new catastrophe bonds and related insurance-linked securities, despite some transactions being postponed due to uncertainty created by the coronavirus pandemic, Aon Securities has said.

Aon logoThe capital markets and insurance-linked securities (ILS) specialist unit of insurance and reinsurance broker Aon highlighted that despite the lull in cat bond and ILS market activity caused by the global spread of Covid-19 and subsequent postponements, issuance is expected to bounce back.

The first-quarter of 2020 saw record levels of catastrophe bond issuance, as the year started strongly with cedents looking favourably on the capital markets as a source of reinsurance and retrocession.

But the coronavirus outbreak worsened and the effects of financial market volatility were felt as activity levels in the market changed, as investors shifted priorities for a time.

The cat bond and ILS market reacted to the pandemic as investors nervously eyed their broader portfolios and some ILS fund managers prepared to service any redemptions that were requested.

Aon Securities said that at the end of the first-quarter, “The worry over the economic impact of COVID-19 intensified, with some investors expressing concern about potential outflows.”

Adding that, “Others elected to implement conservative short-term strategies to maintain fund liquidity.”

The secondary cat bond market saw elevated activity levels as some investors sold off some of their holdings in the asset class in search of cash, as ILS demonstrated its lack of correlation with broader financial markets and in particular equities once again.

But the effects were also felt in the primary issuance of catastrophe bonds as well.

“The volatility surrounding the effects of COVID -19 on the market has caused a few deals to be postponed until the market reflects more stability,” Aon Securities said.

The most noticeable example was French reinsurance company SCOR’s new Atlas Capital 2020 catastrophe bond, which was pulled from the market to allow the volatility to subside.

When the deal returned it did eventually secure the targeted $200 million of retrocessional reinsurance that SCOR had been seeking, but at elevated pricing as investor return requirements rose.

We understand that some other cat bond issues had been postponed as well, with their timetables pushed back to allow for the volatility to subside somewhat.

Now, the catastrophe bond market has sprung back to life, with another four new cat bond transactions currently being offered to investors.

Aon Securities noted the scheduled high-level of maturities coming during the second-quarter and forecast issuance would still be robust, even after the postponement of some deals.

“We expect to see another busy quarter with a strong transaction pipeline,” the broker’s capital markets unit predicts.

The four cat bonds currently in the market together promise $750 million or more of new risk capital issuance. But with numerous other transactions expected, the next two months could be particularly busy.

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