The demand for hurricane-exposed catastrophe bonds has continued at a steady pace for the first half of this year, say analysts at Fitch Ratings.
According to the Artemis Deal Directory, so far this year sixteen catastrophe bonds have been issued or are expected to be issued under SEC rule 144A, featuring named storm risk as a trigger totalling nearly $5.2 billion.
Fitch explained that the volume of transactions is similar to what came to market in the prior year period, but the average deal size has considerably increased with several large-scale renewals completing.
New issue pricing consistently remained at the low end of the initial offered range and a number of transactions increased in size during the marketing process, highlighting the continued interest in structured reinsurance risk.
According to Fitch, amid the first half of 2020 investment market volatility, catastrophe bonds exhibited limited changes in value, highlighting their low correlation with the broader capital markets.
Perceived benefits of catastrophe bonds’ higher liquidity profile and peril-specific coverage relative to other ILS instruments (side cars, collateralised reinsurance) are promoting expanded near-term activity.
However, Fitch noted that, consistent with the traditional market, investors continue to face the risk that loss amplification variables, including social inflation and litigation risk, could exceed initial modelled expectations.
Several large national repeat catastrophe bond sponsors continued to foster market expansion, while smaller insurers of high-risk property also utilised ILS for reinsurance protection in the first five months of 2021.
One of the largest issuers of hurricane-exposed catastrophe bonds is Florida’s insurer of last resort, Citizens, which came back to the market in H1 21 after suggesting that pricing levels were too high at the midyear renewals in 2020.
The $950 million of collateralised limit, spread across two transactions sponsored by Citizens represent nearly 20% of the industry total in 2021.
