Cat bond issuance already up on 2019 as ILS demonstrates its resilience

Cat bond issuance in the first half of the year was already 20 percent up on the whole of the year before, despite COVID-19 delaying some deals earlier this year, according to Aon Securities’ latest Insurance-Linked Securities (ILS) report.

Deals offering some $2.8 billion of property cat bond limit were placed in the 2nd quarter of 2020, pushing the total issuance for the year to $6.5 billion, 20 percent more than the $5.4 billion issued in the whole of 2019.

The total issuance for 2020 is made up 27 property/casualty transactions completed by 24 sponsors with an average deal size of 241 million, versus 23 transactions completed by 21 sponsors in 2019. The total amount of property cat bonds outstanding is marginally down on 2019 at $28.4 billion.

Aon said it believes the busy pipeline will continue over the next two quarters given the expected maturities of approximately $2 billion. “This quarter’s steady flow of new issuances, despite a brief interruption due to the volatility from COVID-19, was a great reminder of the resilience of this market. A total of 13 transactions were issued and received healthy support from investors as 14 of the 18 classes upsized from their guidance,” it said.

Although most transactions priced at their mid-to-wide ends of guidance, the report noted that a slight widening of issuance spreads did not stop repeat sponsors from coming back to market. Repeat sponsors accounted for all the Q2 transactions but one, as Fidelis came to market with their first transaction, Herbie Re Ltd 2020-1, which completed in mid-June.

Aon’s report noted: “As some issuance spreads widened, we saw some investors increase their ticket sizes and others re-enter the space. We still see a preference for cleanly structured deals from high-quality sponsors and investors still seem to favor per occurrence over aggregate triggers as a result of the most recent loss events.”

The report also commented on the impact of COVID-19, which delayed some deals at the end of Q1 and start of Q2 followed by outflows from certain investors. Spreads in the secondary market widened as some investors sold in bulk to reallocate to other opportunities away from ILS, Aon noted.

At the beginning of the quarter, spreads increased to levels reminiscent to 2013, as they had widened about 10 percent on average. “In the primary, COVID led to increased, but reasonable, investor demands for future transactions. Investors requested that exclusionary wording around pandemics and more specific definitions, especially around the term ‘Other Perils,’ be included on future transactions to minimize potential uncertainties.

“So far, it seems that sponsors have not had an issue with this request and some transactions specifically distinguished that COVID-19 could not affect the notes being offered. The ILS market has proven to be resilient, yet again, as the Aon ILS Index remained relatively stable compared to most other market indices after the outbreak of the pandemic.”