The pricing of recent industry index catastrophe bond issues have been at levels last seen prior to hurricane Ian, leading broker Aon to suggest “a quantifiable return to pre-Ian pricing dynamics” has occurred.
The broker has highlighted catastrophe bond market softening in its latest reinsurance report, where it also detailed the return to growth of the ILS market, as alternative capital in reinsurance grew to a new high of $100 billion.
It’s been clear that catastrophe bond pricing has come off the highs seen earlier this year, something we’ve discussed in our analysis and that you can see in near real-time, as new cat bond issuances are completed, in our charts.
But, while our data shows overall cat bond spreads being lower now, than they were, the averages across market issuance remain relatively high.
However, Aon believes that if you look at discreet deals, such as some industry index transactions, there is evidence of a reversion back to pricing levels seen before hurricane Ian drove its losses through the reinsurance market.
“While catastrophe bond returns remain relatively strong in 2023, investors are having to contend with tighter spreads,” the broker explained in its new reinsurance market report.
This has had a positive effect for sponsors though, as Aon explained, “In addition to the increasing supply of capital, catastrophe bond sponsors have also benefited from 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 winter 2022/2023.”
“New issuance pricing has tightened significantly since the beginning of the year; in fact, we note roughly a 40 percent tightening for industry index issuances since the beginning of the year,” the report goes on to state.
Adding that, “When comparing industry index transactions from June and July 2022 (pre-Hurricane Ian) to those issued in May and June 2023, the more recently-priced deals in 2023 priced tighter than those issued prior to Hurricane Ian in 2022, illustrating a quantifiable return to pre-Ian pricing dynamics.”
There has been an influx of capital looking for index trigger and similar cat bond investments, we understand, and industry-loss trigger cat bonds have often priced lower than you might see for indemnity deals, in multiple terms.
But, when you consider most of these are also at the retrocession end of the market and annual aggregate in their nature, this news of a reversion back to price levels seen before hurricane Ian is unlikely to be welcomed by all of the ILS market’s constituents on the investor side.
In our discussions with end-investors in recent weeks, especially those recently invested in the ILS market for the first time, or considering their first allocation to it, there is a strong feeling that too much softening could result in disappointment and even capital deciding to hold back.
The cat bond market needs to be cognisant of this and not over-soften rates as new capital flows in, to protect at least some of the gains made, as investors do want to see pricing discipline evidenced going forwards.
On the flip side, it does need to offer a price competitive product offering if the market is to continue its growth.
The cycle continues, with the only question being how far can spreads tighten this time before capital begins to get more hesitant again.
The decline in industry index cat bond prices has also been evident in the industry-loss warranty (ILW) market, where rates-on-line continue to soften as well, according to our projections that will be updated soon for the new quarter.