Swiss Re says ILS issuance hit new record of $12.8bn in 2021

The insurance-linked securities (ILS) market hit a new high and expanded with “record-breaking” $12.8 billion of new cat bond issuance in 2021, despite the year being the fourth costliest on record for nat cat losses, a new report by global reinsurer  Swiss Re has revealed.

The new ILS issuance was 13% up on 2020 and also outpaced scheduled maturities, leading to an increase in notional outstanding to over $33.8 billion at the end of 2021, according to Swiss Re's ILS Market Insights. Since 2012, the catastrophe bond market has achieved a Compound Annual Growth Rate (CAGR) of 9.4%.

According to the reinsurer, the fourth quarter saw distressed trading from loss-impacted bonds after extreme weather events, including Hurricane Ida. However, a more disciplined secondary market is likely to stabilise itself through 2022, it predicts.

It also notes that the cat bond market has been diversifying perils for investors, with US wind perils accounting for about 35% of the offering, followed by multi-peril aggregate bonds and US earthquakes. Growth and pricing trends were not uniform, it notes, with tighter pricing for well-understood perils like California earthquake. In contrast, structures exposed to high frequency and harder to model secondary perils like thunderstorm and wildfire saw pricing increases and smaller deal sizes.

“This is a sign of a mature and well-functioning market to see such divergence in deal execution both from a pricing and structure perspective,” the authors said.

“Over the years, pricing for aggregate structures has increased, diverging from that of risk-comparable occurrence structures,” the report adds. “Investors have grown weary of higher-frequency, lower-severity events accumulating and causing losses to aggregate layers.”

Despite this, overall, the market remains strong.

“The ILS market continues to demonstrate its resilience with bonds issued in every month of last year apart from August,” the report notes.

“Most encouraging was the number of new sponsors and ESG developments in the asset class. Notable new sponsors this past year included the Government of Jamaica, California insurer Farmers and Dutch insurer NN.”