Natural catastrophe bond issuance is expected to reach record levels this year as the alternative reinsurance capital sector remains strong and viable, Fitch Ratings says.

Investors continue to be committed to the market, reinvesting maturing proceeds and providing additional capital, driving record property-related issuance last year to more than $US11 billion ($15.2 billion).

“With over $US8 billion ($11 billion) of issuance in the first half of 2021, the sector is poised to reach another record this year,” Fitch says.

A robust pipeline of existing and new sponsors includes several “novel sponsors” looking to expand their property protection against natural catastrophes, the Fitch report on insurance-linked securities (ILS) says.

New risk perils linked to mortality or financial guaranty have also been placed at modest amounts and notes linked to mortgage insurance have continued their rapid expansion with more than $US4 billion ($5.5 billion) of placement last year.

Fitch says environmental, social and governance (ESG)-branded catastrophe bonds could be a catalyst for future market growth.

ESG currently is held back with unclear reporting rules, unknown or possibly conflicting regulatory issues and incomplete risk modelling tools.

“As these items get sorted out, the narrowing of the protection gap between economic and insured losses and sustainability initiatives could propel this market segment to new heights, potentially doubling by 2030,” it says.

Alternative reinsurance capital has been hovering around $US95 billion ($130 billion) for three years in a row, the report says, reflecting impacts from elevated losses in 2017 and 2018 and the pandemic, which briefly halted issuances and caused some redemptions as investors sold bonds at attractive prices.

Fitch says principal losses after catastrophes adversely affect investor returns, but payments demonstrate to sponsors that the catastrophe bond market honours valid claim requests and transaction structures are sound.

“The level of losses relative to the total market reveal the sector is reaching sufficient scale for investors to build a diversified portfolio of ILS assets,” it says.