Cat bond activity could surpass expectations in H2 2020: Schultz, Aon Securities

Although the Covid-19 pandemic has undoubtedly stunted primary catastrophe bond issuance, for the most part, deals will get done and it’s possible that activity in the second-half of the year exceeds expectations, according to Paul Schultz, Chief Executive Officer (CEO) of Aon Securities.

As part of our series of video interviews with experts from across the reinsurance and insurance-linked securities (ILS) space, we spoke with Schultz the CEO of insurance and reinsurance broker Aon’s capital markets unit, about catastrophe bond issuance in 2020 amid the ongoing coronavirus pandemic.

The Artemis Q1 2020 cat bond and ILS market report showed that issuance in the opening three months of the year exceeded $5 billion for the first time, as the resurgence of catastrophe risk focused deals continued, alongside some additional mortgage notes.

It’s believed that the issuance pipeline for Q2 was also strong, but the progression of the Covid-19 pandemic has had a significantly adverse impact on financial market stability, and the heightened level of volatility disrupted the ILS market to a degree.

“All things being equal,” said Schultz, “if we hadn’t been living this for the last few months now, we would have seen greater primary issuance. So, there’s no question that the pause we’ve taken will impact Q2 a bit, but I think largely the primary issues are going to come to market and largely the deals will get done.”

According to Schultz, it’s a reasonable scenario where some of the primary issuance might be delayed in the second-quarter of the year, while some might be picked up in the traditional reinsurance markets instead.

Expanding on this, he explained to Artemis that the “complimentary relationship” between more conventional reinsurance and the capital markets’ version of that, has now transitioned from a “competitive” play between the two markets, “to now very complimentary.”

As the ILS community has matured and expanded its remit, convergence has accelerated and the lines between traditional and alternative reinsurance capital have continued to blur.

“It is very easy for clients to move back and forth and I think some of what might have happened might go back into traditional markets, which I think is great that the ultimate cedants are being served in a way that meets their risk transfer needs,” said Schultz.

But, while uncertainty and disruption might well dent primary cat bond and related ILS issuance in the second-quarter of the year, over the latter half of 2020, Schultz explained that there could be potential for increased activity.

“You can paint a picture as we go through the summer, as we get into Autumn, that we actually could make up what might have missed in Q2 and then even more so. I think it is a very easy scenario to say that we could see heightened activity in the second-half of 2020 that wasn’t anticipated.

“So, I still feel like the place of this market, it helps clients manage their risk transfer needs, will be as great or even potentially greater than we even contemplated at the beginning of the year,” he said.

The full video interview is embedded below. All of our video interviews can be viewed online here.

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