Cat bonds see wave of demand, secondary spreads drop 15-20%: Aon

Catastrophe bonds are experiencing a “wave of demand” according to Aon Securities, which has now resulted in spreads dropping by as much as 20%, down to levels last seen in early 2019.

The capital market unit of insurance and reinsurance broker Aon noted in a recent report that new capital inflows into insurance-linked securities (ILS) funds have served to exert pressure on cat bond spreads.

This, alongside over $2 billion of maturing cat bonds from which capital needed to be reinvested has driven the “wave of demand” from investors for catastrophe bonds in Q1 of 2021.

The issuance seen, which fell short of the prior year, was not sufficient to satisfy investor demand for cat bonds, resulting in ILS funds and investors looking to the secondary market, where demand weighed on spreads, Aon Securities reported.

Commenting on secondary cat bond market conditions in Q1, Aon Securities explained, “The market was mostly one sided as investors were looking to put cash to work, and any trades that completed were executed through the offer side.

“As the quarter progressed and the primary market reopened, more offers came and trading gradually increased, but still remained fairly quiet compared to past quarters.”

With excess demand and not enough primary market supply, cat bonds in the secondary market came under pricing pressure, as investors and ILS fund managers sought to put money to work during the first-quarter.

As we’ve been documenting as new cat bonds are issued in Q2 as well, demand related pricing pressure has been driving down spreads at issuance as well, while secondary marks remain pressured too.

Right now, the average multiple at market of newly issued catastrophe bonds is back at levels last seen in early 2019, as we’ve been reporting and you can see in our data and charts.

Aon Securities reports that the same is seen in the secondary market for cat bonds, where, “Spreads tightened to levels last seen in early 2019 and are down approximately 15-20% on average from last year’s wides that were a result of the initial COVID-19 outbreak,” during Q1 2021.

Overall, the catastrophe bond market has tightened, Aon Securities said, and the company believes this will likely continue through the coming months as a significant amount of maturing capital is returned to cat bond investors.

Supply is once again not keeping up with demand in the catastrophe bond market, which is softening both pricing of newly issued bonds and prices of bonds in the secondary market.

Whether this softening will spill over to affect broader reinsurance pricing remains to be seen, but it is making cat bond backed reinsurance protection more affordable for sponsors, given the strong execution seen with newly issued deals.