A busy six months for ILS
Given the uncertainty created by the COVID-19 pandemic, the first six months of 2020 might have been expected to be a relatively quiet period for ILS. In fact, the market has been on a roll, with more issuance in just six months of this year than in the whole of 2019, says Aon Securities.
A total of $2.8 billion of property cat bond limit was placed in Q2 2020, totalling $6.5 billion issued for the year to date, nearly matching maturities, according to Aon Securities, in its ILS Q2 2020 update.
With a total of $5.4 billion in property cat bond limit placed for the entire year 2019, it means 2020 has recorded 20 percent more issuance in the first six months than was managed in the whole of 2019.
The total issuance for 2020 is made up of 27 property and casualty transactions, completed by 24 sponsors, with an average deal size of $241 million. That compares to 23 transactions completed by 21 sponsors in 2019, Aon said. The total amount of property cat bonds outstanding is marginally down on 2019 at $28.4 billion (Figures 1 and 2).
“A slight widening of issuance spreads did not stop repeat sponsors coming back to market.”
Figure 1: Property cat bond issuance and outstanding by year
Figure 2: Property cat bond issuance by quarter
“We believe that the busy pipeline will continue over the next two quarters, given the expected maturities of approximately $2 billion,” said Aon.
“This quarter’s steady flow of new issuances, despite a brief interruption due to the volatility from COVID-19, was a great reminder of the resilience of this market.”
Aon noted that, of the 13 transactions issued in Q2, all received healthy support from investors, with 14 of the 18 classes upsized from their guidance. Although most transactions priced at their mid-to-wide ends of guidance, a slight widening of issuance spreads did not stop repeat sponsors coming back to market.
The majority of Q2 issuance involved repeat sponsors, with only one new issuer—Fidelis —coming to market with its first transaction, Herbie Re Ltd 2020-1, which completed in mid-June.
With some issuance spreads widening, Aon said it had seen some investors increase their ticket sizes, while others that had exited the market took advantage of an attractive entry point.
“We still see a preference for cleanly structured deals from high-quality sponsors and investors still seem to favour per-occurrence over aggregate triggers as a result of the most recent loss events,” Aon said.
In the secondary market, spreads rebounded moderately over the course of the quarter, although they did not make a full recovery to pre-COVID levels. Trading activity had stalled due to the active primary, but towards the end of Q2, when the primary issuance pipeline began to dry up with the start of wind season, investors began to put any remaining unencumbered cash to work.
The market then flipped as bids outweighed offers.
At the end of Q1 and the start of Q2, the impact of COVID-19 had temporarily delayed some transactions, while volatility in the markets had encouraged some investors to take capital off the table, causing secondary spreads to widen.
In early Q2 spreads had increased to levels reminiscent to those of 2013, Aon said, having widened by about 10 percent on average. Aon noted that COVID-19 had emboldened investors to demand more clarity in the wording on primary market issuance.
“Investors requested that exclusionary wording around pandemics and more specific definitions, especially around the term ‘other perils’, be included on future transactions to minimise potential uncertainties,” Aon said.
“So far, it seems that sponsors have not had an issue with this request, and some transactions specifically distinguished that COVID-19 could not affect the notes being offered.”
Proving its resilience
COVID-19 has presented another significant, real-life stress test for the ILS market, and it has proved itself, yet again, to be admirably resilient.
“The Aon ILS Index remained relatively stable compared to most other market indices after the outbreak of the pandemic,” Aon said.
The sell-off witnessed in March led to a small negative return for the Aon ILS Index, but this dip was minimal compared to that experienced in other markets (Figure 3).
Figure 3: Aon ILS Index since inception
“The S&P 500 Index and the Bank of America Merrill Lynch 3-5 Year BB US High Yield Index both experienced double-digit negative returns over the two-month period following the initial COVID-19 outbreak, while Aon’s ILS index saw a less than 1 percent decrease, highlighting the stability and low-correlation of the ILS market.”
The Aon ILS Index recorded a 2.12 percent return for Q2, and a 2.7 percent return year to date.