A recent Moody’s report highlights the record level of issuance seen in the catastrophe bond market during the first half of the year, which at $10.3 billion, is expected to drive future growth in the insurance-linked securities (ILS) asset class.
Cat bond issuance by the middle of August had exceeded the $10 billion for all of 2022, notes Moody’s, and was “propelled” by higher expected returns on the back of “the best property catastrophe pricing in decades.”
Much of the growth was driven by the property cat space, with mortgage ILS issuance remaining muted this year, a trend Moody’s expects to persist given uncertainty in the housing market.
As noted by the ratings agency, cat bond spreads shot up over the past year with investors needing higher expected returns following several higher-than-average catastrophe loss years.
“Higher interest rates and more restrictive coverage terms also contributed to investor demand. We expect inflation and high reinsurance prices to support cat bond issuance for the remainder of the year. Ultimately, the amount of alternative capital available will influence future pricing levels,” added Moody’s.
In 2023, pricing varied across peril and structure types, says the firm. The investor base demanded more risk premiums for annual aggregate coverages relative to occurrence-based coverages to compensate for the increased frequency of severe convective storms and wildfires over the past several years.
“Pricing for cat bonds, as measured by the risk premium divided by expected loss continues to trend higher in concert with improved pricing in the traditional reinsurance market,” concluded Moody’s.
