Cat bond pipeline & flows healthy. Distressed positions targeted: Aon

Conditions in the catastrophe bond market look positive still in 2021, as year-end fast approaches, with both the pipeline for new cat bond issuance and the capital flows to cat bond fund managers healthy, signalling a favourable bond market environment, according to Aon.

The insurance and reinsurance brokers’ capital markets unit, Aon Securities, reports that catastrophe bonds benefited from a shift in investor focus through 2021, as some shied away from the more volatile collateralized reinsurance market and private ILS arrangements.

While overall, Aon’s latest data on the size of the alternative capital market in reinsurance shows that it rebounded and grew 3% to attain its previous high-level of $97 billion earlier this year, the cat bond market outpaced that, with bonds outstanding rising 6%.

Aon said that ILS fund managers, those focused on catastrophe bonds or with cat bond fund strategies, continue to message favourable cash positions and also continue to actively pursue new inflows.

In fact, Aon says that ILS fund managers have been able to attract new money to cat bond strategies, with some coming from new investors to the insurance-linked securities (ILS) sector, but more frequently this being due to existing investors increasing allocations to cat bonds, shifting towards cat bonds, or moving ILS fund managers.

“Healthy pipelines and inflows continue to signal a favorable bond market environment,” Aon explained.

Which suggests that the catastrophe bond and related ILS records we’ve been predicting will certainly fall in 2021.

Also notable, is the fact Aon is predicting some resurging interest in distressed positions in the catastrophe bond and ILS market.

“We expect to see some opportunistic entrants access the market to take advantage of more distressed opportunities in certain segments of the market,” Aon explained.

This has been a trend over recent years, as increasing numbers of distressed asset specialist investors have noticed the way catastrophe bonds in particular can recover value following losses, as the loss picture crystalises, as well as in less-liquid ILS positions where reserving practices and loss development trends can mean additional value is unlocked long after events have occurred.

It’s really another sign of the maturing catastrophe bond and ILS market, as any functioning asset class should have secondary markets and within that some opportunistic players that like to buy and hold certain distressed investments, hoping to benefit from a recovery of value in the future.

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