New issue catastrophe bond spreads likely to keep widening: Twelve

Catastrophe bond returns may continue to improve for investors, as new issuance spreads are expected to continue widening as a result of the ongoing volatility in financial markets, Twelve Capital believes.

The specialist insurance-linked securities (ILS) and reinsurance investment fund manager highlighted that primary issuance spreads for new catastrophe bonds have been on the rise over the past two years.

This is due to the impact of heavy catastrophe losses across the reinsurance and ILS market, which has driven ILS fund managers and their investors to demand more return from the catastrophe risk they underwrite and invest in.

The trend has continued into the first-quarter of 2020 as well, which is evidenced in our chart showing the average multiple at issuance of new catastrophe bonds which has been on the rise since 2017.

Twelve Capital said it, “expects this trend to continue throughout 2020 given recent volatility across financial markets.”

“Tighter supply of reinsurance capital, particularly in retrocession, i.e. reinsurance for reinsurers, has driven price movements higher over the past three years and in turn has pushed Cat Bond spreads to their widest level seen in at least five years,” the investment manager explained.

Adding that, “The volatility in financial markets and some of the technical secondary market selling pressure in Cat Bonds could be a catalyst for further increases in coupons in the short-term, and potentially longer.”

Twelve noted that the issuance pipeline has been robust through the first-quarter of 2020, as we detailed in our newest catastrophe bond market report here.

“Twelve would expect this to continue into the important June renewals, ahead of the North Atlantic hurricane season,” the manager explained.

Although, there is some expectation of a potential slowing and the most recent Cat Bond issuance, a retrocessional deal from reinsurance firm SCOR, has been delayed on the back of the financial market volatility.

As this volatility disappears, the Cat Bond issuance pipeline could spring to life with a significant number of transactions expected this quarter as maturities are set to spike.

Commenting on this, Twelve Capital said, “From a portfolio manager perspective, Twelve is currently in the comfortable position to have the option of either participating in primary market issuances or to purchase existing bonds on the secondary market at a moderate discount.

“In either case, there is sufficient supply in the Cat Bond market to reinvest proceeds from maturing bonds and to absorb new inflows into the strategies Twelve is managing.”

All of which suggests it is a good time for investors to allocate to, or increase allocations to, the catastrophe bond sector right now.