Cat bond execution “attractive” relative to traditional re/insurance: Aon

Catastrophe bond market momentum is expected to continue at a strong pace in 2022, after investor appetite and new sponsors assisted in driving the record issuance seen in 2021, according to Aon Securities.

In the firm’s latest catastrophe bond market report, Aon Securities highlight the impressive fact that upsizing of new primary catastrophe bond issues added $3.18 billion to 2021’s issuance total, helping to drive the new record of $12.5 billion of cat bonds issued for the year.

In 2021, the cat bond market demonstrated “strength on strength” and a combination of new and repeat sponsors, increases in deal volumes (the aforementioned upsizing), record maturities of over $10.15 billion and spread compression, all contributed to the successful issuance year.

Healthy cash positions at insurance-linked securities (ILS) fund managers was another factor that helped, giving plenty of appetite for new issues and helping to secure increased deal sizes for many sponsors.

Right now, sponsors are finding “attractive execution in the ILS market” relative to the traditional reinsurance and retrocession market, Aon Securities said.

This is key and one reason we expect another very strong year in the ILS market in 2022, with catastrophe bond execution enabling sponsors to secure reinsurance, retrocession and also hard to place insurance capacity, at very attractive terms.

The more attractive ILS can become, relative to traditional sources of risk transfer, the more the cat bond market should grow, as increasing numbers of sponsors look to take advantage of this.

As the reinsurance and in particular retrocession market have hardened, cat bonds have become a more competitively priced alternative and are offering significant value for sponsors.

“The inflow of capital has tightened pricing multiples and created a favorable environment for both sponsors and investors with new sponsors providing additional diversification benefits,” Aon Securities explained.

Leading the broker unit to forecast, “This strong momentum is expected to continue into 2022.

“Given the rate hardening market environment, the large volume of capital coming off-risk $5.17 billion in the first half of 2022, and $1.85 billion in the second half of the year, 2022 is poised to be yet another strong year for the property catastrophe bond market with continued investor inflows and competitive pricing.”

On top of this, Aon Securities also points out that we could see more non-insurance entity sponsors coming to market, “as catastrophe bonds continue to prove their advantage as a viable alternative risk transfer mechanism for government and corporate entities.”

One other point of note for 2021, was investors beginning to shy away from some aggregate cat bond positions.

Commenting on fourth-quarter secondary cat bond market dynamics, Aon Securities said, “As losses developed, some investors favoured less risky index bonds. Investors’ demand for occurrence structures continued to grow over the quarter. The aggregate notes may likely remain less liquid as the market takes in the loss reports.”

However, looking ahead the company expects the market will remain active, as “The issuance pipeline for 2022 is developing, so we expect trading to continue to be vigorous in the new year.”