Strong Second Quarter Sets Stage for Record Year for Catastrophe Bonds

The issuance of catastrophe bonds and related insurance-linked securities (ILS) reached a record $8.6 billion during the second quarter of 2021, according to a new report from Artemis.

The Q2 2021 Catastrophe Bond & ILS Market Report, released July 1, suggests that the catastrophe bond market is on track to set multiple records this year. The $8.6 billion in second-quarter issuance represents the first time the market has seen quarterly issuance top $8 billion, Artemis said.

The report, based on data from the Artemis Deal Directory, notes that the second-quarter issuance included 31 transactions consisting of 67 tranches of notes.

Almost $6 billion of the quarter's new volume—more than 70 percent—covered catastrophe risks, according to Artemis, trailing only the second quarter of 2017 when $6.4 billion of issuance covered catastrophe risks.

For the first half of the year, catastrophe risk issuance reached a new high of more than $8.5 billion, according to the report, a new record for first-half catastrophe risk issuance.

The report notes that while 2020 set the full-year record for property catastrophe risk issuance at more than $11 billion—the first time there had been more than $10 billion in property catastrophe issuance in a single year—the $6.6 billion in catastrophe risk deals done through the first half of 2020 is significantly less than the $8.5 billion issued during the first half of 2021.

Compared to the same period in 2020, first-half catastrophe bond and ILS issuance increased by approximately $4.8 billion, as first-half 2021 issuance topped the $10 billion market for the first time.

Second-quarter issuance also included $2.3 billion of mortgage risk, the report said. That mortgage ILS issuance represented 26 percent of total catastrophe bonds and related ILS issued during the quarter, Artemis said.

"In fact, combined with robust investor demand and sponsor appetite in Q1, the $8.6 billion of issuance witnessed in Q2 takes H1 2021 total issuance to a massive $13.2 billion," the Artemis report said. "To put this into context, more than $13 billion of issuance at the halfway stage makes 2021 already the third most active year on record, behind only the $16.4 billion and $13.9 billion recorded in 2020 and 2018, respectively."

Five new catastrophe bond sponsors entered the market during the second quarter, according to the Artemis report.

"Together with the 27 transactions sponsored in Q1, the 31 issued in Q2 takes the number of deals brought to market in H1 2021 to 58," the report said. "As shown by the Artemis Deal Directory, this is above the full-year total for all years prior to 2017. Furthermore, if the strong issuance trend persists, it seems likely that 2021 will see more deals than the record 80 seen last year."

Risks covered in the second-quarter catastrophe bond and related ILS issues included US multiperil, international multiperil, Japan earthquake, Japan multiperil, US earthquake, mortgage insurance risks, US named storms, Texas multiperil, unknown property catastrophe risks, and Louisiana multiperil.

International multiperil was the most frequently covered exposure, representing 35 percent of second-quarter issuance, the report said.

The second quarter's $8.6 billion in new issuance was $4.3 billion more than the 10-year average for the second quarter, according to Artemis. And the quarter's 31 transactions easily surpassed the average of 19 over the past 10 years.

The average deal size in the second quarter was $295 million, approximately $75 million more than the 10-year average for the quarter, the report said. This year's second quarter also marked the first time monthly issuance in each month exceeded $2 billion, Artemis said. After 9 new issues came to market in April, May and June each saw 11 new issues.

While deal sponsors used a variety of trigger structures in the second quarter's issues, indemnity coverage was most common, representing 75 percent of the risk capital issued, Artemis said. Another 20 percent of the quarter's issuance relied on industry loss index triggers, while more than 1 percent of issuance used parametric triggers. Three triggers for three private deals, representing 3.3 percent of issuance, were unknown.

New issuance during the first half of 2021 brought the volume of outstanding catastrophe bonds and related ILS in the market to a record $51.6 billion, according to the Artemis report. "The Artemis Deal Directory shows that more than $4 billion of deals are scheduled to mature in the remainder of 2021," the report said. "However, if current market trends persist and investor demand remains high, it seems likely that despite maturities the market will achieve outright growth once again."

The strong second quarter and first half of 2021 come on the heels of a record year for catastrophe bond and related ILS issuance in 2020.

Last year's issuance of $16.4 billion exceeded 2018's previous record issuance by more than $2.6 billion and was up $5.3 billion from 2019's level, according to Artemis. Outstanding catastrophe bond and ILS volume stood at $46.4 billion at the end of 2020.

The catastrophe bond and related ILS market's 80 transactions brought to market in 2020 topped the previous 1-year record of 67 deals.