Cat bond issuance reaches $9.7bn in 2018, rate hardening expected: Swiss Re

After experiencing 18 months of above average industry losses, Swiss Re expects that ILS investors will want to see rates harden in 2019, especially for loss-impacted tranches.

The reinsurer's latest review of the catastrophe bond and insurance-linked securities (ILS) market suggested rate hardening could be expected for aggregate transactions and those structures exposed to perils with less robust catastrophe models.

"Since 2012, cat-bond spreads have trended downward as investors established comfort in the market, but like any other market, spreads do not always move in one direction," the report said.

"Despite a potential hardening scenario we believe the ILS value proposition still rings true as a diversifying and complementary capacity source," it added.

According to the report, the overall ILS market closed the year strongly with new issuance, an active trading period, and new sponsors entering the market, despite higher catastrophe activity.

New issuance of ILS reached $9.7 billion in 2018, making it the second-highest year of issuance volume since its inception.

Third quarter issuance ($1.55bn) nearly doubled from the same time period in 2017 ($780m), even as market participants braced for the peak of hurricane season. The increase was largely attributed to new sponsors NFIP and PG&E issuing their first-ever cat bonds, which covered pure flood and pure wildfire perils, respectively.

Fourth quarter 2018, however, had a below average level of issuance with only $536 million, partly attributed to the lower volumes of European sponsors accessing the market versus previous years. Swiss Re said it was the lowest issuance for any Q4 since 2008 when no new bonds were issued.

The reinsurer also noted that several sponsors returned to the ILS market in the second half of 2018, seeking to renew capacity for maturing tranches.

Market volatility spiked in the second quarter of 2018 due to the California wildfires and Hurricanes Florence and Michael. While this exposed a variety of cat bonds to potential losses, it also underscored the market’s value as a diversifying asset class and source of consistent liquidity to investors.

The report said that increased catastrophe activity in 2017 had little impact in overall issuance prices in 2018, though the sponsors generally targeted less risky tranches of notes.

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