Catastrophe bond market sees record start to 2018

High levels of cat bond issuance activity resulted in a robust start to the year.
LONDON - April 3, 2018 - PRLog -- The market for catastrophe bonds has witnessed a brisk start to 2018 with a record $4.24 billion of new cat bonds issued in the first-quarter, according to Artemis.bm, a leading source of news, analysis and insight on the growing insurance-linked securities (ILS), catastrophe bond and reinsurance capital markets.

In 2017 the catastrophe bond market was hit by its heaviest losses in history, as the impacts of hurricanes Harvey, Irma and Maria, as well as other catastrophe losses including the California wildfires, resulted in significant impacts to a number of exposed cat bonds, with even heavier losses across the rest of the ILS asset class.

Despite this heavy loss toll, 2017 saw record catastrophe bond issuance of $12.56 billion, according to Artemis' data, and now 2018 has started off even more robustly, with a record first-quarter that saw $4.24 billion of new catastrophe bonds issued.

Steve Evans, Owner and Editor of Artemis.bm, commented, "After a trying second-half to 2017, when the catastrophe bond market and other insurance-linked securities (ILS) instruments suffered their largest losses to-date, the resilience and robustness of the ILS market has been clearly demonstrated by this bumper issuance in Q1 of 2018."

This is the fifth consecutive year that catastrophe bond issuance has broken records in the first-quarter and the roughly $4.24 billion of new risk capital was brought to market through 17 separate transactions.

Steve Evans continued, "The catastrophe bond and ILS investor community demonstrated its support for the market and appetite to assume new risk even following the major catastrophes of 2017, resulting in strong demand for any new cat bond issues so far this year.

"The majority of cat bond issues in Q1 saw their advertised spreads tighten during the quarter, as investor appetite helped insurer, reinsurer and sovereign sponsors to secure their catastrophe risk transfer at attractive pricing."

Almost all of the transactions issued in the first-quarter of 2018 increased in size as their order books were oversubscribed by investors eager to allocate capital to insurance risks.

"Investors, such as global pension funds, sovereign wealth funds, family offices, and other institutional money managers, continue to demonstrate a strong appetite for insurance and reinsurance as an asset class. Capital continues to be allocated to catastrophe bonds and ILS, largely through specialist ILS fund managers, as institutional investors seek returns through an asset class that displays very low-correlation with the movement of stock and bond markets," Evans said.

"The way these investors have dealt with their losses from last year's major catastrophes and traded forwards effectively is testament to the maturity of the ILS and catastrophe bond market," continued Evans.

As a result of the strong issuance and thanks to the support of investors, the market of outstanding catastrophe bonds grew by almost $1.8 billion during the first-quarter of 2018, reaching a new high of over $32.8 billion.

The influence of the capital markets and ILS in reinsurance continues to grow and this efficient route to bringing underwriting capacity to market has a disruptive effect on incumbents at a time when their margins have been squeezed.

Evans explained, "The effect on traditional insurers and reinsurers has been dramatic, as the amount of third-party capital in ILS vehicles has grown, forcing many to embrace it both for their protection and by managing it to generate a source of fee income.

"These effects show no sign of disappearing, making it increasingly important that re/insurers identify strategies that will allow them to make the most of capital market investors interest in insurance risk as an asset class, while still getting paid for their risk origination, analysis and underwriting skills."

Looking ahead the ILS asset class and the issuance of catastrophe bonds are both expected to witness continued high levels of activity throughout the rest of 2018.

"It's expected that cat bonds and other ILS will further cement their position as a key part of global insurance and disaster risk transfer markets in 2018, resulting in further growth throughout this year.

"By the end of 2018 the amount of insurance and reinsurance capital provided via non-traditional sources from the capital markets is likely to surpass $100 billion and we forecast another strong year for ILS, as re/insurers increasingly put it at the heart of their business models," Evans forecast.

Download a free copy of the latest edition of Artemis' quarterly catastrophe bond market report here.

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