Catastrophe bond market can expand further in 2022: Willis Re

The catastrophe bond market has a good opportunity to continue expanding and the current elevated activity could run right into 2022, according to reinsurance broker Willis Re.

In reporting on the mid-year reinsurance renewal season, after which the market is said to be approaching equilibrium, Willis Re explained that catastrophe bond issuance has been particularly strong, something the broker anticipates will continue.

As we detailed in our new cat bond market report, which we published yesterday, activity has been particularly brisk, with around $6 billion of 144A property cat bonds issued in the second-quarter of 2021.

Added to private cat bonds deals and other types of insurance-linked securities (ILS) we track, the quarterly issuance total hit a record $8.5 billion ($8.6bn if you include an additional private deal that has emerged).

This period of rapid cat bond issuance and strong capacity support from the capital markets did have an influence on the reinsurance renewals, Willis Re explained.

In Florida, for example, cat bond activity ramped up the supply of reinsurance capital, which alongside new market entrants meant that renewal outcomes varied, with differentiated results depending on cedent quality and their protection buying needs.

The momentum that began in the cat bond market during Q1 was “firmly consolidated in Q2” Willis Re explained, becoming the second most active second-quarter the catastrophe bond market has ever seen, as our new report explains.

Capital and interest from investors has helped to stimulate more activity as well, with catastrophe bond backed reinsurance coverage becoming particularly compelling.

Willis Re said that, “Significant inflows of investor capacity into the ILS space has not only driven the previously mentioned notable capacity issuance but has also resulted in margins narrowing and new cedants entering the space.”

James Kent, CEO of Willis Re further explained, “ILS markets continued to be buoyant attracting significant interest from investors, particularly for well-structured public catastrophe bonds which has led to a narrowing of spreads for both US and non-US placements.”

These ILS market spreads have now tightened relative to 2020 issues and are perhaps back on a par with those seen in 2019, reflecting strong investor appetite and capital inflows, particularly to catastrophe bonds.

Which Willis Re expects will set the stage for continued strong issuance of cat bonds, right into 2022.

“This momentum is expected to continue throughout the remainder of 2021, ensuring that the 1January 2022 renewals will provide a good opportunity for continued expansion of the cat bond market,” the reinsurance broker explained.

The catastrophe bond issuance pipeline remains active, with three deals in the market and more expected to come this month.

Suggesting there is every chance of breaking cat bond records again in 2021, setting us up for a very interesting 2022.

Read all about recent issuance in our second-quarter catastrophe bond and related ILS market report.