ILS investors took advantage of diversification opportunities in Q1 2021

Catastrophe bond and related insurance-linked securities (ILS) issuance provided investors with both peril and regional diversification in the first-quarter of 2021, as shown by the Artemis Deal Directory.

In times of financial market volatility, such as the Covid-19 pandemic and the 2008 global financial crisis, the catastrophe bond asset class has proven its ability to provide investors with positive diversification characteristics.

But while the defensive asset class offers low-correlation and diversification from broader financial market turmoil, driven by the fact the exposures are largely related to natural catastrophe events, diversification is also evident within the asset class itself.

During the first-quarter of 2021, $4.7 billion of new risk capital came to market from 27 transactions comprised of 45 tranches of notes.

Of this, a significant 60%, or $2.8 billion offered protection against property catastrophe risks, and included deals from new, repeat, and unknown sponsors.

The Artemis Q1 2021 cat bond and related ILS market report shows that, earthquake risk accounted for the largest slice of property cat bond issuance in the period, at $983.3 million.

$600 million of this provided protection against U.S. earthquake risks and came from a $200 million Sierra Ltd. (Series 2021-1) transaction and a $400 million Torrey Pines Re Pte. Ltd. (Series 2021-1) transaction.

Also in the U.S., the California Earthquake Authority (CEA) returned in Q1 2021 with $215 million of California earthquake coverage via Ursa Re II Ltd. (Series 2021-1).

Japanese insurer Tokio Marine brought some regional diversification for the earthquake peril in the quarter via Kizuna Re III Pte. Ltd. (Series 2021-1), a $150 million transaction covering Japanese earthquake risks. While Asagao III – White Rock Insurance (SAC) Ltd. added a further $18.3 million of Japanese earthquake risk to overall issuance.

Interestingly, Sakura Re Ltd. (Series 2020-1) from Japanese insurer Sompo – the only deal to cover multiple perils in multiple countries – featured some U.S. earthquake exposure, on both a first and second event basis.

This $400 million transaction provided investors with both peril and geographic diversification; covering Japanese typhoon and Japanese flood risks as well as the aforementioned U.S. quake coverage.

Two deals issued in the quarter provided some state-specific diversification in the U.S. The larger of the two, a $250 million transaction sponsored the North Carolina Insurance Underwriting Association issued via Cape Lookout Re Ltd. (Series 2021-1), covered losses from named storms and severe thunderstorms in North Carolina.

The other deal focused on Florida and was sponsored by Security First Insurance Company. This deal, First Coast Re III Pte. Ltd. (Series 2021-1), closed at a size of $225 million and offered protection against Florida named storms and severe thunderstorms.

The largest ever FloodSmart Re Ltd. transaction also came to market in the opening quarter of this year, as FEMA continues to leverage the capital markets to secure flood reinsurance for its National Flood Insurance Program (NFIP).

FloodSmart Re Ltd. (Series 2021-1) brought $575 million of U.S. flood risk (from named storms) to market in Q1.

The first ever cat bond sponsored by Universal (UPCIC), the $150 million Cosaint Re Pte. Ltd. (Series 2021-1) deal, provided protection against U.S. named storm risks.

Additionally, a host of private deals from unknown sponsors provided investors with $217 million of U.S. and unknown property cat risk diversification in the period.

Finally, a novel transaction was sponsored by the Danish Red Cross in Q1 2021, Dunant Re IC Limited. This $3 million, privately placed deal provided investors with peril diversification in the form of volcanic eruption, which is a first for the market (on a stand-alone basis).

The transaction is structured to payout if a volcanic ash plume reaches a certain height and prevailing wind directs the resulting ash to fall towards vulnerable communities.

It covers the ten volcanoes considered to pose the greatest humanitarian risk. This includes one in Mexico, one in Colombia, one in Chile, one in Guatemala, one in Cameroon, two in Indonesia, and three in Ecuador.

Outside of the catastrophe arena, Aetna, a regular market participant, issued its usual $200 million Vitality Re deal, which brought some healthcare diversification to market.

Also in Q1, Build America Mutual Assurance Company returned with its second Fidus Re Ltd. transaction, which transferred $150 million of financial guarantee risks to capital market investors.

Mortgage ILS issuance accounted for the second largest slice of issuance in the quarter, as three deals from repeat sponsors Arch Capital, Genworth, and MGIC boosted overall issuance by $1.47 billion.

As the chart above shows, the 144A cat bond market remains heavily focused on the U.S. property cat sector.

However, the perils and regions on offer during the period were diverse and when you include mortgage ILS deals and also non-cat transactions, investors clearly have more options than ever to access insurance or reinsurance-linked returns through the cat bond and wider ILS asset class.

Stay tuned to Artemis as we move through the second-quarter of 2021, which is forecast to be a busy period for new catastrophe bond issuance and we’ll detail every transaction in our Deal Directory.

We’ll keep you updated on all catastrophe bond and related ILS transaction issuance, as well as evolving trends in the cat bond and insurance-linked securities (ILS) market.

For full details of first-quarter 2021 cat bond and related ILS issuance, including a breakdown of deal flow by factors such as perils, triggers, expected loss, and pricing, as well as analysis of the issuance trends seen by month and year.

Download your free copy of Artemis’ Q1 2021 Cat Bond & ILS Market Report here.

For copies of all our catastrophe bond market reports, visit our archive page and download them all.