Moody’s has reported that the catastrophe bond market saw record issuance in 2020 despite a brief pause in Q2 following a particularly tumultuous period for the financial markets.
And looking ahead through 2021, the rating agency expects cat bond issuance to continue to grow with strong investor demand for the asset class, evidenced by a reduction in spreads and upsized deals seen over the last several quarters.
According to Moody’s future growth in the 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.
“The cat bond market has again proven resilient despite some losses and principal payouts, largely from prior period reserve development,” analysts said in a new report.
According to the Artemis Deal Directory, cat bond and ILS risk capital issued in 2020 stood at $16.44 billion, with outstanding capital at $46.36 billion. And for 2021, issued capital has already reached $10.40 billion.
Despite the market dislocation with the onset of the coronavirus pandemic, cat bond issuance specifically increased in 2020 to $11.4 billion, nearly double the issuance in 2019 and about tied with 2017 for the most active year on record.
Cat bond issuance thus far in 2021 has already outpaced the prior year with nearly $8 billion of issuance as strong investor demand provides attractive conditions for sponsors.
Similarly, mortgage ILNs are on track to surpass the level reported in 2020, and now represent nearly 30% of all ILS outstanding.
Moody’s believes that future growth in the asset class could likely come from closing the protection gap internationally, especially given the increased interest in ESG investing, or from potential new perils such as cyber, once modelling further develops.
While cat bond spreads had been trending upward in the first half of 2020 in response to the coronavirus pandemic and impairment losses from 2017 and 2018 catastrophes, spreads began to tighten toward the end of the year as the economy stabilized and investors sought the diversification benefits of this distinct asset class.
Moody’s observed that spread tightening has continued thus far in 2021 fuelled by investor demand, prompting sponsors to upsize their cat bonds as pricing rises in the broader reinsurance and retrocessional market.
