Cat bond market in a strong position with busy pipeline: Schultz, Aon

The catastrophe bond market pipeline is expected to be busy through the third and fourth quarters of 2020, according to Aon Securities CEO Paul Schultz, which sets the stage for potential near-record levels of issuance this year.

The latest annual insurance-linked securities (ILS) report from Aon Securities, the capital markets division of the insurance and reinsurance broker, highlights robust issuance over the twelve month period to June 30th 2020.

In total, the company reports $9 billion of catastrophe bond issuance and record quarters in Q4 2019 and Q1 2020, suggesting the market is ripe for further growth as the overhang created by the COVID-19 pandemic disappears.

COVID-19 caused a slowdown in catastrophe bond issuance, as the market took a pause while investors digested the global capital markets situation, but then rebounded strongly with “busy activity in May and June respectively”, Schultz said.

Despite the impacts of prior year losses and the disruption caused by the coronavirus pandemic, the catastrophe bond market has remained buoyant and able to meet cedant needs.

Even with the effects of the pandemic, “During this interesting time in the market, ILS capital in place has decreased from $93 billion at this time last year to $91 billion. By June 30, 2020, catastrophe bonds outstanding were $28.8 billion, 1.5% less than June 30, 2019,” Schultz said.

Aon Securities report highlights, “the resilience of the ILS market throughout the first few months of the COVID-19 pandemic.”

“The strong performance of the uncorrelated assets made this market a source of fresh capital to take advantage of distressed asset valuations. The ILS market reacted positively, with capital meeting selling pressure, driving only modest price movements, even at the very worst of the market. This has been especially promising, in comparison to the traditional markets, which did see more than modest hardening,” the report explains.

The twelve months to June 30th 2020 period saw, “new sponsors and repeat issuers come to market, along with new geographical coverages and innovations in the cat bond market,” Schultz further explained.

The $9 billion of issuance, which includes life and health ILS transactions in catastrophe bond form, secured during the twelve months under review was up significantly by $3.5 billion year-on-year.

That clearly demonstrates the potential for further growth, should pricing in the catastrophe bond market remain attractive for reinsurance buyers through the end of 2020.

There is a clear opportunity for the catastrophe bond market to capitalise on the crunch in capacity and much higher pricing in retrocession as well, with industry loss cat bonds perhaps likely to have a busy period of issuance through year-end and into early 2020, we believe.

Schultz noted the likelihood of further buoyant activity in the catastrophe bond market, saying there is an, “anticipated busy pipeline activity for Q3 and Q4 2020.”

While considerable uncertainty over the COVID-19 pandemic remains across the world, “we see the catastrophe bond market in a strong position,” Aon Securities report notes.

“Hardening in the traditional market will drive ILS issuance on a case by case basis as we move forward. Capital inflows will depend on broader financial systems, but with equity and debt markets pricing close to pre-crisis levels in some cases and with a prolonged low interest rate environment, the demonstrated value of the ILS markets will drive capital to this market.”

There is a chance of record levels of catastrophe bond issuance in calendar year 2020, particularly if the stars align on pricing and the cat bond market offers a readily-available source of retrocession to major reinsurance firms.

Whether records are met or not, the performance of the cat bond market in 2020 has been impressive to say the least and helped to underscore the values inherent in the ILS asset class both for cedants and investors.

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