Cat bond investors show both appetite & caution at renewals: Plenum

At the end of last year and around the key reinsurance renewal season, catastrophe bond funds and cat bond investors showed both their strong appetites for assuming risk, as well as some caution when it comes to risks that are less frequently seen in the cat bond market, investment manager Plenum explained.

Plenum Investments, the specialist Zurich-headquartered catastrophe bond and insurance-linked securities (ILS) asset management firm, noted that the catastrophe bond market saw solid issuance at the end of 2021, as the reinsurance renewals approached.

The end of calendar year reinsurance renewals also mark what is traditionally the second-busiest period of catastrophe bond issuance, after the pre-mid-year renewal issuance cycle.

Late 2021 was no exception, with strong primary catastrophe bond market issuance during December.

Artemis counted 10 new catastrophe bonds issued in December, bringing roughly $1.42 billion of new risk opportunities to investors. You can track monthly catastrophe issuance in our new chart.

Plenum Investments highlighted that this included a number of new sponsors, which was a very positive feature of the cat bond market in 2021, as first-time issuers can often become repeat transactions in future years.

A wide-range of catastrophe perils were place in the cat bond market in 2021, as sponsors sought insurance, reinsurance and retrocession capacity through the insurance-linked securities (ILS) market.

That’s also notable, the fact insurance, reinsurance and retro protection were all sought in a single month in the cat bond market, as corporate sponsors, insurers and reinsurers all brought deals to market.

Plenum explained that cat bond investor demand for most issues was very strong in December, as appetite for new paper helped to drive down pricing and premium for some of the cat bonds issued in December.

On average, Plenum estimates premiums fell roughly 5% across December cat bond issuance, but in some cases prices fell much more, as investor appetite was stronger.

However, Plenum also noted that it was interesting to see that where premium or price increased for new cat bonds issued in December, it was for risks that are less commonly placed in the catastrophe bond market.

In particular a riskier European windstorm transaction and riskier worldwide perils deal were seen to have the steepest price increases, Plenum explained.

“This shows that the overall investor sentiment towards new types of risks is that of caution,” the investment manager said.

Strong demand for catastrophe bonds is no surprise, Plenum said, after a year in 2021 when catastrophe loss activity was largely benign for cat bonds, despite having more significant impacts for collateralised reinsurance and retro.

In addition the ongoing volatility in global capital markets “highlights once more the attractiveness of the cat bond market for its low correlation to the capital market,” Plenum said.