ILS Market Remains Strong as First-Quarter Issuance Exceeds Average

Unphased by the COVID-19 pandemic, the insurance-linked securities (ILS) market continued to thrive through the first quarter of 2021. While the quarter's new issuance might have fallen short of last year's record pace, new catastrophe (CAT) bonds and related ILS issuance exceeded the 10-year average.

Data from the Artemis Deal Directory showed $4.63 billion in catastrophe bond and related ILS issuance during the first quarter of 2021, down from the record-breaking $5 billion in the first 3 months of 2020 but almost $2 billion over the 10-year average for the period. It was the third time in the last 4 years that first-quarter issuance topped the $4 billion mark, according to Artemis.

In its own first-quarter insurance-linked securities report, Aon Securities reported $2.57 billion in property catastrophe bonds issued during the first quarter. While down from the $3.75 billion in property CAT bonds placed during 2020's first quarter, issuance during this year's first 3 months was the third-highest first-quarter total in the past 10 years, the Aon Securities report said.

The first quarter's ILS market activity included nine property-casualty transactions brought to market by nine sponsors, Aon Securities said. The average deal size was $285 million. In comparison, the first quarter of 2020 saw 14 transactions completed by 13 sponsors with an average deal size of $268 million.

The total volume of property catastrophe bonds outstanding increased by $450 million to $31.5 billion at the end of this year's first quarter, Aon Securities said.

Aon Securities said it expects the elevated ILS deal pipeline to continue through this year's second and third quarters, as $4.4 billion in bonds are expected to mature in the second quarter and $1.1 billion in the third quarter.

The first quarter's flow of new deals along with transactions that are anticipated for the remainder of the year "is a confirmation of the resilience of this market, with this positive momentum also anticipated to continue for the remainder of 2021," the Aon Securities report said. "A total of nine transactions were issued and received healthy support from investors as 11 of the 13 classes upsized from their guidance, with one new issuer entering the P&C primary market in Q1."

Aon Securities said it sees investors preferring "cleanly structured deals from high-quality sponsors" and favoring occurrence triggers over aggregate triggers as a result of recent catastrophe loss events.

Capital inflows and $2.06 billion in maturities created "a wave of demand" for CAT bonds during this year's first quarter, Aon Securities said. Despite the size of the quarter's new issuance, however, new issue volume couldn't meet increasing demand, and investors frequently turned to the secondary market in search of investment opportunities.

In its report, Artemis noted that the risk capital raised through first-quarter catastrophe bonds and related ILS came from 27 transactions with 44 tranches of notes.

"Of this, a significant 22 transactions with a combined value of roughly $2.8bn covered catastrophe risks, which accounts for over 60 percent of issuance," the Artemis report said. "Mortgage ILS issuance was also strong in the quarter, while the volume of private deals and non-CAT ILS also increased year-on-year."

The majority of the first quarter's insurance-linked securities issuance came from repeat sponsors, Artemis said, "including a mix of regular market participants and others returning for just their second or third time in the market's history."

Perils covered by insurance-linked securities issued during the first quarter included US earthquake, Japan earthquake, US named storm, volcanic eruption, mortgage insurance risk, US flood risk, financial guarantee risks, medical benefit claims levels, and US property catastrophe risks, according to Artemis. There were also several multiperil issues and an issue covering unknown property catastrophe risks.

March was the first quarter's most active month for ILS issuance in terms of the volume of risk capital issued, Artemis said. February issuance declined year-on-year but remained well above the 10-year average. January issuance fell short of both January 2020's level and the 10-year average for the month.

While catastrophe risk represented 60 percent of the first quarter's new ILS issuance, it did dip a bit as a percentage of total quarterly issuance, as mortgage insurance deals increased in prevalence, Artemis said.

Catastrophe bond and related ILS issuance boomed in 2020, setting a new record at $16.4 billion, according to Artemis. The 2020 total exceeded 2018's previous record issuance by more than $2.6 billion and included $6 billion in new issues during the year's fourth quarter. The year's catastrophe bond and ILS issuance was up $5.3 billion from 2019, according to the Artemis Deal Directory.

The $6 billion in new issuance during 2020's fourth quarter was a fourth-quarter record and was far greater than the market's 10-year average of $3.5 billion for the quarter. As noted, the first quarter of 2020 also saw record issue volume, and both the second and third quarters saw above-average catastrophe bond and ILS issuance, according to Artemis.

The Artemis Deal Directory showed 80 catastrophe bond and related ILS transactions coming to market in 2020, also a record, topping the previous high of 67 deals.