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Q2 2021: A Record Quarter for ILS

Record ILS issuance has taken place with $8.6bn issued in the last quarter, results which have been described as “staggering” by an Artemis Report published recently. The annual increase in CAT bonds and Mortgage ILS issuances means 2021’s issuance in H1 has also been record-breaking at over $13bn and makes this year one of the most active.

This last quarter has been predominantly propelled by an increase in traditional 144A cat bonds by repeat institutional sponsors which made up over 70% of all issuances. This regular activity has also been boosted by a number of new players, which invested heavily into unknown property catastrophe risks and Japan earthquake risks. Some of the new players entering this market have been Vantage Risk, St. Johns Insurance Company and Blackstone’s real estate captive Gryphon Mutual Insurance Company. This expanding sponsor base and increase in the number of deals suggests that at year end, 2021 will surpass 2020’s record of 80 deals in total.

The average size of deals has increased also. Prior to the record year of 2017, mean deal size was $75m lower than the average deal so far this year, which currently sits at around $295m. Notably, one of the largest CAT lite transactions ever at $250m was issued in the last quarter.

Some consistencies in issuance can be found in the types of triggers written into ILS transactions structures this year. Again, indemnity coverage has been the primary trigger which was present in more than 75% of bonds issued, and industry loss index is represented in around 20%.

With regard to the specific perils covered by transactions this year, international multi-peril bonds which cover various territories made up the majority at over ⅓, but specific territory issuance saw Japan, Texas, Louisiana and Florida protected in a number of large deals. It should be noted that ILS as an asset class has a huge role to play in the category of ESG investing, which this quarter’s results suggest such risks are growing in appeal for investors.

Coupon prices and expected loss number have also shown that investor trends of seeking the highest multiple with the lowest risk/return deals has continued. Due to demand, Q2 of 2021 saw 94% of tranches price below initial guidance, perhaps an indicator of the reasons behind the boom in the ILS market this year so far.

Overall, these results show not only impressive growth in the ILS market for this year, but as this comes off the back of an already strong year in 2020, it is safe to suggest that this resilience throughout the Covid-19 pandemic suggests sustained growth overall is on the horizon.

"For the first time in the market’s history, catastrophe bond and related ILS issuance surpassed $8 billion in a single quarter during Q2 2021, setting a new quarterly record at $8.6 billion. This staggering level of new risk capital came from 31 transactions consisting of 67 tranches of notes."

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