New cat bond supply, allocator rebalancing helped stabilise pricing in Q4: Aon

The catastrophe bond market saw a more stable pricing environment in the fourth-quarter of 2023, as the trend towards tighter pricing that had begun earlier in the year slowed down, Aon Securities has said.

In the latest report from the specialist insurance-linked securities (ILS) investment banking group of global insurance and reinsurance broker Aon, the unit explained that market dynamics helped to balance supply and demand more, resulting in price stabilisation.

“Catastrophe bond pricing tightened throughout the course of 2023; by June, for example, industry loss index catastrophe bond pricing tightened by up to 40%,” Aon Securities said.

The brokers’ unit had previously explained that pricing of industry index catastrophe bond issues around that time had been at levels last seen prior to hurricane Ian, which was a significant tightening.

However, by September the reinsurance brokers at Aon were saying that the delta between pricing in insurance-linked securities (ILS) and traditional property catastrophe reinsurance was providing “a clear signal” to the market and set to provide further competition for peak risks.

Which is how things turned out later in the year, as sponsors looked to the catastrophe bond market for complementary covers higher-up, as well as diversifying capacity that could be locked-in over multiple years.

Aon Securities explained that, “Pricing however stabilised during the fourth quarter, due largely to an overwhelming supply of new transactions brought to market, coinciding with some ILS investors handing back capital to their allocators as they looked to rebalance their profitable 2023-year allocation to ILS.”

However, this market dynamic did not stop sponsors looking for reinsurance and retrocessional coverage from the catastrophe bond market during the period.

Aon Securities noted that in Q4 2023, “Those pursuing capacity in the catastrophe bond market were rewarded with meaningful capacity at terms that proved beneficial relative to traditional reinsurance, with many issuing companies’ primary objective being a diversified source of multi-year capacity.”

It’s worth noting though, that pricing of recent industry loss index trigger catastrophe bond issues has typically been at levels below guidance, some significantly so.

These deals have been experiencing strong investor demand and sources also tell us some strategies that target these index trigger bonds have had excess capital to deploy, which has helped to drive demand for these cat bonds even higher.

It’s too early in the first-quarter to suggest the tightening still being seen will continue, but with investor appetite very strong for catastrophe bond funds still, the expectation is that sponsors will continue to be treated to strong execution over the coming months.