With catastrophe bond spreads rising alongside traditional reinsurance and retrocession, the market is now experiencing its biggest pricing reset since hurricane Katrina in 2005, according to Plenum Investments.
At the same time, capacity remains more limited, which is likely helping to buoy those spreads and ensure the new higher-levels are going to be sticky for longer, it seems.
Specialist catastrophe bond asset manager Plenum Investments noted that the primary market has actually been quite busy in recent weeks, despite the uncertainty that hurricane Ian brought to investors.
That uncertainty is reducing by the week, especially as some loss estimates are proving to have been too large and as a result the cat bond market is recovering some of the mark-to-market losses it suffered.
But primary issuance was quite strong, with the number of new cat bonds being marketed actually outpacing a year ago through November.
But, despite the pipeline looking busy, the actual volume of issuance in dollar-terms is down roughly 30% year-on-year, Plenum explained, saying, “The reason being that the capacity available in the cat bond market is tight at the moment, prompting brokers to issue smaller sizes than they would have otherwise issued.”
While the volume issued and size of new cat bonds may be down, the spreads are significantly higher.
Prompting Plenum to state that, “The spreads offered on the new issuances are significantly higher than those on equivalent transactions issued in prior years.
“So far, we have observed a staggering 85% premium increase on average. Such premium increases have not been observed in the cat bond market since hurricane Katrina in 2005.”
This is significant, as it means the cat bond market is largely erasing the softening period of the last more than a decade from its pricing.
The question now being whether the new price levels can remain sticky to a degree, or at least that the industry can install a new baseline for spreads and stick to its pricing guns going forwards?