The catastrophe bond market has experienced a remarkable surge, with an 8%, or $2.8 billion increase in outstanding notional value since the beginning of the year, according to Aon’s Reinsurance Market Dynamics report.
With robust new issuance volumes, industry experts anticipate that 2023 is poised to become a record-breaking year, with total issuance surpassing $8.6 billion year-to-date.
According to data from Artemis, our insurance-linked securities (ILS) focused sister publication, catastrophe bond and related ILS issuance hit more than $10.3 billion in H1 2023 after a record $7.1 billion of issuance in Q2.
These figures are higher than Aon’s as the Artemis totals for Q2 and H1 issuance include private deals and those covering non-cat risks.
The cat bond market has played a pivotal role in driving the growth of insurance-linked securities (ILS) capital, which has now reached an impressive $100 billion as of March 31, 2023, according to Aon’s figures.
This surge in capital supply has provided cat bond sponsors, including insurance companies, with a valuable source of alternative capacity to complement their reinsurance purchases.
Notably, cat bond sponsors have experienced the dual benefits of increased capital supply and significant spread tightening. Excluding life and health transactions, pricing spreads for spring 2023 transactions have tightened by 15 to 25 percent compared to those issued in the previous winter.
This favourable market condition has led to heightened interest among end-investors, prompting existing and new ILS investors to raise additional funds for cat bond strategies.
One of the driving factors behind the market’s growth is the attractive nature of cat bonds to investors. The combination of elevated spreads relative to previous years, floating rate returns, and annualised collateral returns exceeding five percent in USD issuances has boosted the total return on investment for 2023, says the report.
As a result, the cat bond market has become increasingly appealing, particularly when compared to wider spread levels observed across credit and fixed income markets. The relatively short duration and diversification benefits offered by cat bonds have further enhanced their attractiveness as an asset class.
Despite the positive performance of cat bonds in 2023, investors are grappling with tighter spreads. New issuances have experienced a significant tightening of pricing since the beginning of the year, with a remarkable 40 percent reduction for industry index bonds.
Furthermore, a comparison between industry index transactions prior to Hurricane Ian in 2022 and those issued in May and June 2023 reveals that recent deals have been priced tighter, indicating a return to pre-Ian pricing dynamics.
Looking ahead, Aon Securities predicts a vibrant marketplace for the cat bond market throughout the remainder of 2023.
