More ILS capital likely to reallocate to cat bonds: Aon Securities

After a record-setting quarter for the catastrophe bond market in Q2 2021, the market is on record-breaking pace and issuance is expected to continue to be supported by capital inflows and also an expectation that more capital will be reallocated to cat bonds from other areas of insurance-linked securities (ILS), according to Aon Securities.

Investors have been favouring the more liquid, transparent and often predictable nature of the catastrophe bond structure over other areas of ILS fund investments like collateralized reinsurance and retrocession, over the last year.

This reallocation of ILS investor capital was driven by some unexpected losses and uncertainty surrounding private ILS and collateralized reinsurance, which has helped some of the larger cat bond funds to expand significantly over recent quarters.

While this reallocation of ILS investor priorities and appetite has also helped to support the strong issuance seen in the cat bond market, as new sponsors turned to cat bonds as a risk transfer tool.

Aon Securities, the capital markets and ILS focused unit of the insurance and reinsurance broker, reports that Q2 2021 was record-setting on a number of fronts.

While there were $4.5 billion of scheduled maturities to reinvest, Aon Securities notes that market momentum far exceeded the capital redeployment, ushering in a robust quarter for both investors and sponsors.

“Investors continued to focus on the diversifying nature and liquidity benefits of cat bonds, leading many ILS Funds, European UCITS Funds and Global Asset Managers to be very successful in their capital raising efforts,” Aon Securities explained in its latest report.

Adding that, “The freshly raised capital helped to support the market which finds itself at a record-breaking pace.”

As we reported recently, the UCITS catastrophe bond fund segment has been growing particularly fast of late, with combined assets across this segment rising roughly 58% in just one year.

The reallocation of capital to catastrophe bonds is now expected to persist and provide an additional driver for issuance going forwards.

“We expect additional capital to be reallocated from other areas of ILS into the cat bond space as investors continue to emphasize liquidity and a reduced risk tolerance, further building on the strength witnessed in the first two quarters,” Aon Securities noted.

Large institutional investors, such as pension funds, have often cited a desire to see more catastrophe bond opportunities in the past.

It now seems that this appetite stands a better chance of being satisfied, as capital seeking to be deployed into the cat bond segment of the ILS market is likely to help keep pricing attractive for sponsors, while supporting the issuance volumes and resultant allocation opportunities that investors would like to see.