Solid issuance as catastrophe bond market performs in time of crisis: Q2 2020 Report

The market for catastrophe bonds and related insurance-linked securities (ILS) once again demonstrated its resilience in the second-quarter of 2020, as despite the uncertain environment created by Covid-19, issuance of new cat bonds and ILS reached $3.76 billion according to the latest report and data from Artemis.

Our latest quarterly report on the catastrophe bond and related insurance-linked securities (ILS) market is available for you to download now.

The report, ‘Q2 2020 – Issuance levels solid as market once again performs in a time of crisis’, analyses a buoyant second-quarter that saw $3.76 billion of new cat bond and related ILS issuance and analyses the composition of transactions issued during the three-month period.

It was the fifth time in the last decade that Q2 issuance surpassed the $3.5 billion mark, as is typical of what is usually one of the busiest periods of issuance for catastrophe bonds and any type of reinsurance or retrocession related ILS transaction given the renewals that occur.

This year, Q2 issuance surpassed the prior by roughly $149 million, but fell by more than $1.3 billion from the level seen in Q2 2018 and was down some 46% on the record Q2 of 2017.

Artemis’ data on the catastrophe bond and related ILS market shows that primary issuance was more muted at the start of the quarter, as a result of COVID-19-induced financial market volatility and uncertainty.

However, deals that were pulled, largely returned and completed, and combined with solid investor and sponsor appetite, issuance remained in-line with the ten-year average for the period.

Second-quarter issuance was dominated by repeat sponsors, with Fidelis Insurance being the only new sponsor to enter the market in the period in search of capital markets backed reinsurance via cat bond structure.

Once again, second-quarter issuance was also supported by mortgage ILS notes, which accounted for 12% of new risk capital issued in the period. Although this came to the market late in the quarter from regular sponsor Arch, as the ILS market for mortgage reinsurance largely locked up due to the COVID-19 volatility in capital markets.

At 18 new transactions in total, Q2 2020 actually saw a slightly above average number of new catastrophe bonds and related ILS deals coming to market in the quarter. The average size of transactions, at $209 million, was also slightly above the long-term average.

Despite the uncertainty and volatility created by the COVID-19 pandemic, cat bond issuance remained brisk right through the period with only a short couple of weeks where deals locked up and some were withdrawn.

In the main these came back to market, as sponsors had a requirement to source their reinsurance and retrocession prior to renewals and the ILS market’s investors were ready to support this.

Indemnity deals dominated, at 77% of the risk capital issued, as is typical of the period with many primary insurer sponsors tapping the cat bond market for their reinsurance capacity.

The peril mix was particularly diverse though, with diversifying opportunities available for ILS funds and investors to deploy their capital into.

Catastrophe bond rates were seen to rise strongly during the quarter, following the firming of reinsurance pricing in general, with multiples at market returning to levels last seen in 2012/13.

By the end of the first-half of 2020, cat bond and related ILS new issuance had reached $8.81 billion, the third highest H1 on record, according to Artemis’ data.

The outstanding catastrophe bond and ILS market size stood at $41.5 billion at the end of June, reflecting a roughly $900 million fall in size since the end of Q1.

Despite brisk issuance, the volume of new cat bond and ILS deals failed to outpace the significant number of maturities seen in the quarter.

But with July already seeing four new cat bond transactions in the market, there is every chance that the COVID-19 pandemic pushes some activity into the third-quarter that may originally have been slated for the second.

The uncertainty caused by the pandemic clearly had an impact on issuance levels in Q2. However, catastrophe risk focused deals continued to come to market and the fact the ILS asset class again performed well during a time of crisis, should drive more investors to look at the space as it moves through the remainder of the year.

Stay tuned to Artemis as we move through 2020 and 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 second-quarter 2020 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 by month and year.

Download your free copy of Artemis’ Q2 2020 Cat Bond & ILS Market Report here.

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