The twin, positive impacts of rising prices and much improved terms means that the hardening market environment isn’t going away anytime soon, suggesting ever-increasing success for the insurance-linked securities (ILS) space, according to Brad Adderley, senior partner in Appleby’s Bermuda office who has been involved in a significant number of ILS transactions.
Poised to surpass $16 billion for the very first time, annual catastrophe bond and related ILS issuance in 2020 is set to break numerous records.
Excluding a slight lull during the height of the Covid-19 pandemic earlier in the year, the catastrophe bond segment once again showed its resilience to financial market turmoil and volatility.
“Cat bonds are booming and I don’t think that’s going to be any different for next year,” said Adderley, in a recent interview with Artemis. “As it’s becoming more mainstream, people are getting more comfortable with it and, as more corporations like Alphabet (Google) enter the space, others look at that and think, ‘maybe this is something we need to consider.’”
Alphabet Inc., the parent of Google, sponsored its first catastrophe bond in November, a $237.5 million California earthquake transaction. Owing to the success of this placement, the company returned in December with an additional $95 million deal also covering earthquake risk in the State of California.
“The Alphabet and the Bayview transactions this year, which Appleby worked on, are all big deals because you see non-insurance entities, corporates, entering the space in a big way. It’s not like a $50 million deal, it’s $300 million and more. And, so, I think that creates its own natural following.
“People always said for cat bonds to grow we need new products. Well, although that’s nice, is it actually more to do with needing more sponsors and more deals? So, now that Google’s done it, what other large corporates are going to be thinking the same way?” continued Adderley.
In light of the coalescence of new sponsors, a hardening marketplace and much better terms, “you’re going to see the ILS market go from strength to strength,” said Adderley.
“I personally believe that the hard market is here for a while. You’re still not getting any investment return and we have more and more insurance companies than ever before talking about underwriting for profit, and not from anything else. And, you still have people struggling to do that, in my mind.”
As shown by the Artemis Deal Directory, while a challenging year for the broader financial markets, it’s been a bumper period for catastrophe bond and related ILS issuance.
Of course, the expansion of the sub-sector into other risk areas, notably outside of the property catastrophe arena, would undoubtedly take the market to even greater heights.
But, as noted by Adderley and evidenced by the significant level of new risk capital brought to market this year, new sponsors, together with rising prices and more favourable terms, have boosted the market in 2020 and the expectation is that this positive momentum is going to persist for some time.