Cat bond activity bounces back in 2023

Catastrophe bond issuance looks likely to set a new record this year, despite a relatively quiet Q3, with observers also confident that next year will be active too.

The third quarter has been quiet for cat bond deals compared to a highly active first half of the year, although a few deals were still placed.

This included SageSure’s affiliated captive reinsurer Anchor Re in July closing its first ever cat bond. The platform secured $50mn of multi-year retrocessional protection against a series of US named storms in a qualifying year.

The Gateway Re Series 2023-3 cat bond provides protection against losses faced by cat-exposed property-focused MGA SageSure’s carrier partners SURE and SafePort.

That latest placement marked SageSure’s fourth foray into the ILS market this year, all of which have seen Swiss Re Capital Markets act as the sole structuring agent and bookrunner.

Swiss Re Capital Markets also structured and placed another July issuance – a $250mn cat bond providing protection to certain real estate funds managed or controlled by the world's largest alternative asset manager Blackstone.

The transaction is Blackstone's first indemnity cat bond, and covers named storms and earthquakes in the US and Canada.

The deal was issued by Wrigley Re on behalf of Gryphon Mutual Property Americas IC, which acted as insurer for real estate funds managed or controlled by affiliates of Blackstone.

In addition, homeowners insurtech Slide in July secured an additional $100mn of coverage through its second cat bond issuance, Purple Re 2023-2, which covers named storms and hurricanes in Florida and South Carolina.

Tampa, Florida-based Slide tapped the cat bond market for the first time in April, securing $100mn of coverage via Purple Re 2023-1.

Several private placement deals were also completed during Q3.

H1 very active for cat bond issuance

These deals followed a very active first half of issuance this year.

In an ILS report in September, Aon noted that the first half saw record-breaking issuance volume, with a total notional issued amount for 144A property cat bonds of $9.7bn. The issuance volume, issuance count and number of clients by the end of the first half of the year had all already exceeded 2022 full-year levels.

Aon said this indicates a “full recovery following the impacts of Hurricane Ian”. The second half of 2022 had been muted partially due to the broader economic concerns related to inflation and the war in Ukraine, which were then exacerbated by Hurricane Ian.

This year has proven to be a much better year for both investors and issuing companies.

In the report issued in September, Richard Pennay, CEO of ILS for Aon Securities, said: “Investors have benefited from catastrophe bond returns greater than anything experienced over 20 years. Secondary spreads tightened as principal losses associated with Hurricane Ian failed to materialize in a significant way, resulting in mark-to-market gains.”

Investors have generated double-digit returns as of the end of the first half of this year.

In the report, Aon outlined that the year started slowly, but the second quarter turned into the largest issuance quarter the cat bond market has ever seen.

At the half-year stage of 2023, the market had $38.6bn of outstanding cat bonds, which Aon said further demonstrates market growth and the value proposition that investors see in this class.

Investor assets under management (AUM) in the first half increased more than $5bn from the end of 2022. This resulted in more than $3.6bn of cat bond market growth as of the end of June, an approximate 10 percent increase from year-end 2022.

“Growth in AUM – resulting from both investors’ successful capital raises and reinvested premium earned on outstanding issuance – is poised to result in record-breaking issuance volume for 2023,” the report said.

The third quarter tends to be the quietest for property cat bond issuance before picking up in the fourth quarter. This suggests that this year is still on track to surpass the record $12.5bn of issuance seen in 2021.

A Swiss Re report released in August also said that the market is on course to set a new record for issuance for the whole year.

Talking to The Insurer in September, Jean-Louis Monnier, ILS head in Swiss Re’s Alternative Capital Partners unit, said that issuance was very active until the end of July.

Paul Schultz, CEO of Aon Securities, told this publication the same month that he was optimistic that the ILS industry can reach $14bn-$15bn in issuance this year. He also believed this momentum is going to carry over into 2024. “We're expecting a healthy or elevated amount of issuance next year as well,” he told this publication.

The executive reported that a lot of conversations were taking place that will lead to issuance in the near term.

“But there are also a lot of newer conversations going on,” he said. “The lead time around issuing outside of the traditional insurance and reinsurance space has always been longer, but what we're having are more conversations in that space. So we're actually quite bullish around increased participation from public sector and corporate markets.”

Swiss Re’s Monnier said that he “wouldn't be surprised” to see increased participation from nationwide US insurers sponsoring cat bonds in 2024.

“In the US, we’re quite optimistic that maybe some nationwide insurers that have managed prudent growth in the face of relatively scarce reinsurance and ILS capacity in 2023 will probably seize opportunities to grow in the underlying markets,” he said.

“There’s also been a readjustment in premiums in the underlying insurance markets. So we would expect large nationwide issuers to be heavier users of ILS in 2024,” he added.

One example of potential upsized use of cat bonds also came from a Bloomberg report in October that the World Bank is planning to expand its cat bond use from $1bn to $5bn over the next five years.

Bloomberg’s report cited Michael Bennett, head of market solutions and structured finance in the World Bank’s treasury department, describing the strategy as “ambitious but realistic”.

One factor that is attracting entities to the cat bond market is the comparatively positive returns. This year the securities are up ~17 percent, while investors in US treasuries have lost money.

Bennett said the World Bank’s plan is to expand the range of natural disasters covered by the bonds. This means it will not only utilize bonds for hurricanes, pandemics and earthquakes, but also for disasters such as floods and droughts.

This is, in part, related to a drive to improve insurance protection for ever more frequent and significant natural catastrophes.

Otis expected to trigger World Bank cat bond

There have been few losses to cat bonds in 2023.

However, October’s Category 5 Hurricane Otis is expected to trigger a payout from Mexico’s Fonden cat bond, which was originally issued by the World Bank in 2020.

The bond was designed to cover four distinct perils: low-frequency earthquakes, high-frequency earthquakes, Atlantic Ocean hurricanes and Pacific Ocean hurricanes.

Coverage for each of the four perils feature payouts that range from $60mn to $125mn, with specific parametric triggers that must be met for activation. The total value of the bond is $485mn.

Otis is understood to have had a minimum central pressure of 923 mb at landfall, which is sufficient to meet the 935 mb or below trigger for the $125mn Class D Fonden 2020 cat bond notes. It is expected the storm will trigger a 25 percent or 50 percent payout of the principal outstanding.

ILS manager Plenum Investments in October said there is “a high probability that the bond will experience a 50 percent loss to the notional due to Hurricane Otis”. It added that Otis is unique as “there has never been a hurricane of this intensity in this part of Mexico in the past”.

The storm came ashore in one of the most populated areas of Mexico’s Pacific coast, with the Acapulco metropolitan area having a population of more than one million people.

The local economy is driven by tourism, creating potential for property direct and facultative claims to arise from damage to hotels and hospitality businesses.