The catastrophe bond market has reassumed its growth trajectory during the first-quarter of 2023, with a “markedly” increase in transaction sizes in the second half of 2022, Aon explained in its April Reinsurance Market Dynamics report.
Aon said that the cat bond market has performed “relatively well” during the first-quarter of 2023, as investors have realised that Hurricane Ian’s estimated industry loss of $47.9 billion in Florida is unlikely to result in significant loss of principal to the overall market.
“While pricing remains elevated from levels achieved in 2021, it has tightened during the first three months of 2023 from peak levels seen at year-end 2022, a development welcomed by both insurers and reinsurers particularly at a time when pricing in the reinsurance and retrocession markets remain heightened relative to the prior decade,” notes the global broker.
“Capital markets investors have taken note of the relative value of the catastrophe bond market compared with other alternative asset classes, especially considering the persistent volatility that continues to pervade the broader financial markets,” Aon added.
While the cat bond market has been growing, collateralized reinsurance remains somewhat constrained and the sidecar market has not grown substantially, Aon’s latest data shows.
Aon estimates the mark-to-market loss impact of Ian exceeded $2 billion out of the $36 billion of total outstanding notional across the catastrophe bond market.
As the Q1 issuance activity developed, Aon said, “investors kept busy, working with their own end-investors to encourage further deployment of capital into the market. Investors were largely successful in their respective capital raises, came to the market eager to deploy freshly raised funds at heightened pricing levels.”
“Net capital inflows during the first two months of 2023 combined with the relatively quiet start resulted in price tightening of approximately 12 percent during the quarter,” the broker added.
“The sponsors benefited from the improved economics compared to year-end; that said, current margin levels have still proved very attractive to investors.”
In March, the cat bond market saw a significant increase in new issuance activity with seven transactions totaling above $1.8 billion being closed during the period, including $500 million sponsored by Florida Citizens Property Insurance Company.
Aon said there are significant amount of cat bond bond risk capital set to mature during Q2 2023, investors are keen to see this deployed.
“While risk more broadly was thoroughly repriced during the past 12 months, catastrophe bond investors are benefiting from higher margins, floating rate returns, relatively short duration, and the diversification benefit of this asset class,” Aon noted.
“In light of the above market dynamics, all signs point to continued market growth as we confront the summer months and the North Atlantic hurricane season of 2023,” the broker concluded.
Aon’s alternative capital commentary comes soon after Artemis, our insurance-linked securities (ILS) focused sister publication, released its Q1 2023 cat bond and related ILS report, which examines another busy quarter for the space.
