The increased demand for the bonds, which were one of the first insurance-linked securities when they debuted about 25 years ago, was one of the drivers that helped push the 2020 cat bond market to its record $11.3 billion in new issuance, market sources say.

“Catastrophe bonds helped to fill some of the retrocession capacity,” said Philipp Kusche, New York-based global head of ILS and Capital Solutions for TigerRisk Partners Inc. Limited capacity in the retrocession sector was “one of the trends seen in fourth-quarter 2020,” he said.

Retrocessional reinsurance provides protection for reinsurers. Historically, the coverage was provided by traditional reinsurers and specialty retro writers, but over the past decade ILS structures, including collateralized reinsurance, sidecars, industry loss warranties and cat bonds, have played a bigger role in the retro market. “We have seen a number of reinsurers, including Swiss Re, continue to be users of the catastrophe bond market,” Mr. Kusche said.

Swiss Re Ltd. used catastrophe bonds in 2020, issuing notes through Matterhorn Re, after returning to the ILS market in 2019 with the Matterhorn Re SR 2019-1 A catastrophe bond, according to the reinsurer’s March ILS report. The 2020 bonds provide a total of $685 million of protection in two tranches on a PCS index, per occurrence basis against U.S. named storms affecting coastal states from Texas to Maine and Northeastern states.

Other reinsurers issuing catastrophe bonds in 2020 included Hamilton Re, a unit of Hamilton Insurance Group Ltd., and Convex Group Ltd., the specialty insurer and reinsurer founded by former Lloyd’s of London underwriter Stephen Catlin.

The Convex bond Hypatia Ltd. provides $150 million of retrocessional coverage for losses from U.S. named storms, including the District of Columbia, Puerto Rico and the U.S. Virgin Islands, and U.S. and Canadian earthquake risks, on an annual aggregate basis, using a weighted PCS industry loss index trigger, through June 7, 2023, according to listing information on the Bermuda Stock Exchange website. Many ILS transactions are listed on the BSX.

Hamilton Re’s Easton Re Pte. Ltd. provides $150 million of coverage for U.S. named storm and U.S. earthquake through Jan. 8, 2024, according to the BSX.

Cat bonds helped fill in a retraction in retrocessional capacity due to existing market participants exiting the marketplace, said Brad Adderley, a Bermuda-based corporate partner at law firm Appleby. Improved pricing and investor demand also helped bolster cat bond performance, he said.

Improved catastrophe bond pricing is partially due to increased demand as the vehicles were used to replace reduced capacity, Mr. Adderley said.

Increased supply from both catastrophe bond investors and the market for ultimate net loss coverage led to 7% year-over-year growth in nonproportional retrocession capacity, said Des Potter, managing director in London for GC Securities, part of Guy Carpenter & Co. LLC.

The retrocession market showed shifting demand for capacity as index cat bond issuance grew to provide approximately 28% of nonproportional retrocession capacity, he said. Meanwhile, traditional retrocession catastrophe placements decreased by 9% and standalone catastrophe in direct and facultative placements grew by 32%.

The cat bond market is expected to maintain its momentum.

Issuance in 2021 is already at “a fairly high level and we expect that to carry forward throughout the year,” said Mr. Kusche of TigerRisk. “We expect continued use of the catastrophe bond market throughout 2021.”

Guy Carpenter expects a continued flow of new allocations to the insurance-linked securities asset class after the recent disruption in the financial markets from the pandemic reaffirmed the low correlating features of the ILS asset class, Mr. Potter said.

Share
Twitter LinkedIn Email Save as PDF
More Publications
8 Oct 2021 |

Your will could expire after you marry again

Several events that occur during many of our lives should be considered reminders for us to review o...

30 Sep 2021 |

Labour disputes and certification/decertification process

There has been much discussion in the news recently about labour disputes between different unionise...

Contributors: Jordan Knight
30 Sep 2021 |

Changing attitudes

Bermuda:Re+ILS speaks to Brad Adderley, partner at Appleby, about how Bermuda will maintain its posi...

1 Sep 2021 |

Changes to rules on Permanent Residency Certificates

The Ministry of Labour has recently issued a policy paper, ‘Securing Permanency for Long-Term Resi...

26 Aug 2021 |

What to remember when an employee leaves

Just as when a new recruit is on-boarded, there are a variety of tasks an employer needs to deal wit...

23 Aug 2021 |

BMA seeks more seamless marketplace with ILS process enhancements

Recent changes made by the Bermuda Monetary Authority (BMA) to improve processes specific for catast...

17 Aug 2021 |

ILS Bermuda Executive Roundtable 2021

Despite the impacts of the Covid-19 pandemic and subsequent restrictions on travel and face-to-face ...

13 Aug 2021 |

A digital asset future: closer than we think

Most of us at some point in our lives have participated in a rewards programme either at our favouri...

26 Jul 2021 |

What not to forget when an employee leaves

There are many practical and ‘housekeeping’ matters that employers need to deal with when an emp...

Contributors: Jordan Knight
23 Jul 2021 |

Contributed surplus: it’s not capital!

Last week, in part one, we discussed the meaning of share premium, the various ways a company may us...