In a new report referencing Artemis Deal Directory data, Moody’s Investors Service highlights that renewed and rising demand for catastrophe bonds among insurance-linked securities (ILS) investors has served to drive spreads lower.
As we’ve been explaining over recent weeks, spread tightening in the catastrophe bond issuance market has now driven multiples to levels last seen in 2019.
That softening of cat bond rates has also spilled over into the industry-loss warranty (ILW) market as well, while broader collateralized reinsurance has been able to hold onto the firming trend at renewals it seems.
Driving this has been investors demand for the more transparent, predictable and liquid structure of catastrophe bonds, as well as the higher-layers of reinsurance towers that cat bonds typically occupy.
Moody’s analysis of our Deal Directory data on catastrophe bond pricing and expected losses found that the more risk-remote tranches of cat bonds are the ones where the multiple-at-market has declined farthest and fastest in 2021 so far.
Multiples are still down for the majority of natural catastrophe bond tranches with higher expected losses as well, indicating broad softening of cat bond rates compared to the last year.
Which leads Moody’s to conclude that, “In 2021, market conditions remain favorable for sponsors as investor demand continues to keep spreads in check.”
Commenting on the dynamics that should help keep the catastrophe bond market active, Moody’s said, “Institutional investors will continue to contribute to alternative capital inflows while market conditions remain favorable. The liquidity of the asset class has again been tested and proven. On the supply side, we expect more issuance, particularly from reinsurers, as collateralized retro pricing remains high.”
Moody’s also noted that it is catastrophe bond activity that is currently driving ILS market growth and expects that to continue.
“Growth in the broader ILS market thus far in 2021 has been driven by returning sponsors and property catastrophe risks,” the rating agency said.
Adding, “Future growth in the insurance linked securities (ILS) market will likely be driven by pure cat bonds from traditional and non traditional sponsors as well as insurance-linked notes from mortgage insurers.”
Other factors that could drive further growth include the ESG appetite from investors, especially if catastrophe bonds can be used to close protection gap situations, as well as modelling developments that enable new perils to be covered.
Outside of this, Moody’s notes that corporate cat bond activity is another potential growth avenue for ILS, but warns that, “absent tax reform or increased domestic US special purpose reinsurer activity, hurdles remain to increased corporate issuance.”