Early indications suggest shift in cat bond market momentum: Aon Securities

Activity in the catastrophe bond market during the first quarter of 2023 suggests that sponsors have built on the orderly year-end renewal, with initial indications pointing to a shift in momentum across the market, according to Aon Securities, the insurance-linked securities (ILS), catastrophe bond and capital markets arm of the insurance and reinsurance broker.

In terms of catastrophe bonds outstanding, the overall size of the marketplace remained stable during the fourth quarter of 2022, a period in which investors pushed for higher pricing on deals amid hardening reinsurance market conditions which accelerated following Hurricane Ian.

While issuance volume in Q4 was down year-on-year, it remained robust, and as well as improved pricing, saw investors look to maintain relationships with sponsors by reallocating maturities into new issuances.

“Q1 2023 has built on this orderly year end renewal; initial indications suggest a positive shift in momentum across the market,” says Aon Securities in a recent report – Post Hurricane Ian Market Update.

Soon into 2023, market commentary signalled a flurry of cat bond activity in the first quarter. However, the early year pipeline has been smaller than anticipated, says Aon Securities, but as maturing issuances have failed to entirely match new capacity and investors experiencing capital inflows, sponsors have benefited from positive execution, both in terms of size and pricing.

“Such market signaling is sure to bolster the cat bond pipeline through the end of Q1 and into Q2 as sponsors continue to seek alternate capital solutions,” says Aon Securities.

As of March 7th, 2023, the Artemis Deal Directory shows that almost $1.6 billion of catastrophe bond and related-ILS issuance has come to market, of which more than $1.1 billion cover property catastrophe risks, including $49 million of privately placed deals.

What’s more, Artemis is aware of six more deals that are currently scheduled to complete in Q1 2023, which at their current size would add a further $900 million to the Q1 2023 issuance total, taking property cat bond issuance to $2 billion and total issuance to around $2.5 billion.

Artemis’ data shows that at this level, Q1 2023 cat bond and related ILS issuance would be in line with the ten-year average for the quarter, although down on the past three years.

In the aftermath of Hurricane Ian, Aon Securities notes that mark-to-market movements on spreads across outstanding bonds were signicaint and clearly much larger than the potential principal losses alone.

Overtime, the broker expects that many bonds will revert to par at maturity, providing there are no further loss events, which would clearly benefit investor returns in the years ahead.

“In the months since the Hurricane, this trend has further been realized as the true industry loss of Ian is not as severe as initially feared, with investor confidence returning as a consequence,” says Aon Securities.

Adding, “Historically, higher margins and the diversification of the asset class, relative to the broader financial markets, has resulted in meaningful market growth, which is likely to be welcomed by sponsoring companies in 2023, as reinsurance pricing remains elevated.”