Cat bond sector to flourish in post-Covid marketplace

The 144A catastrophe bond market will see new sponsors coming to the market as cedants try to manage the increased pricing in the traditional reinsurance and retro markets and the tightening of collateralised capacity on offer, according to GC Securities’ Cory Anger.

GC Securities is a division of MMC Securities LLC, a US registered broker-dealer and member FINRA/NFA/SIPC.

The cat bond market has already seen a surge in issuance during the first half of 2020, in part reflecting the high number of three and four year deals that have matured and are seeking renewal within the cat bond market.

As Anger, GC Securities’ managing director, told The ReInsurer, both 2017 and 2018 were high cat bond issuance years. With the average length of securities at three or four years, 2020 and 2021 were already expected to see a high number of 144A transactions take place, she explained.

That only tells part of the story however. The collateralized reinsurance and retro market, Anger said, “is under stress” having been affected by the greatest magnitude of unexpected losses within the ILS sector and trapped capital. Investors have grown wary of unmodelled, unexpected losses that have been most apparent in the illiquid ILS sector.

In response, reinsurers have been increasingly turning to the catastrophe bond for their protection needs, Anger said.

“Coming into this year…reinsurers have been embracing the ILS market in other forms, more specifically the 144A cat bond market,” said Anger.

“We don’t expect that to abate. We actually expect to see quite a few new sponsors utilise the market given what’s happening,” she said.

Key to the cat bond market’s growth are two things, Anger said – capacity and demand, both of which remain strong at present. Investors remain attracted to the catastrophe bond market and the diversification benefits it provides, while sponsors like the product being offered.

At the same time, the cat bond market has not experienced unexpected Covid-19 related losses when compared with the collateralized reinsurance and sidecar segments.

“The cat bond market has virtually no exposure to Covid-19,” Anger said. The exception, she said, is the World Bank’s pandemic bond that triggered a payout this past spring.

“Other than that,” Anger said, “the 144A cat bond market has seen a minimal impact from the pandemic.”

“In fact, because there weren’t any [material] valuation changes [in comparison to broader capital market asset valuation changes] in the cat bond market, it has again proven itself to be a resilient strategy when the broader capital markets are facing stress,” she added.

“With respect to the sidecar market, that’s where I expect we will see more follow-on implications of Covid-19 related losses coming into the market. The collateralized re market is somewhere in the middle ground,” said Anger.

As the executive explained, the 144A catastrophe bond product “has best matched what it was advertised to provide, both in the sense of return and loss performance and the perils that are being covered”.