Cat bond issuance likely to reach record heights in 2023
2023 is trending towards the greatest ever annual catastrophe bond issuance on record, according to a new study by Aon Securities.
The Aon Securities annual ILS report revealed that overall insurance linked securities reached $100 billion in 2023 while the outstanding cat bond limit grew more than $3.6 billion in the first half of 2023, a 10% increase since the end of 2022.
The report said the last 12 months represented a contrast between the second half of 2022 and the first six months of 2023, with 2022 characterised by market dislocation from the war in Ukraine, inflation and the impact of Hurricane Ian in September 2022.
“This amounted to material mark-to-market losses and a lack of investor appetite to fully satisfy the demand for catastrophe bond capacity in the fourth quarter,” the report said. “Consequently, catastrophe bond spreads widened, in line with the hardest reinsurance and retrocession market observed in several years.”
But the report added: “2023 to date has proven to be a much better year for both investors and issuing companies. Investors have benefited from catastrophe bond returns greater than anything experienced in over 20 years. Secondary spreads tightened as the principal losses associated with Hurricane Ian failed to materialise in a significant way, resulting in mark-to-market gains. Wider issuance spreads and a material increase in collateral returns, which in some cases are now yielding a per annum return of greater than 5%, have further increased catastrophe bond returns this year.
“In fact, investors have already generated double-digit returns as of the end of the first half of 2023. Higher returns have fuelled further capital inflows, helping to absorb the rising demand for catastrophe bond capacity from sponsors.”
The report said to date in 2023, the ILS market has executed over $10 billion of new issuance, with the market well on track to be the largest issuance year on record.
It added: “With the ILS market now in its third decade, its ability to bounce back and grow during a time of economic uncertainty and increasing natural catastrophe frequency, is a true testament to its resiliency and overall value proposition to all stakeholders.”
The report said that growth in asset under management — resulting from both investors’ successful capital raises and reinvested premium earned on outstanding issuance — is poised to result in record-breaking issuance volume for 2023.
“As expected, spreads began to tighten by the first quarter of this year as a result of abundant capital flowing into the market and the lack of materialising losses from Hurricane Ian and other cat events throughout the latter half of 2022 and into 2023.”
The report said through June 2023, the concentration of risk remains largely triggered on an indemnity basis, with indemnity triggered transactions constituting 66% of total issuance; industry index triggers, 29%; and parametric triggers, 5% of the total amount of notional issued this past year.
“As in prior years, the risk is driven by US perils, although European and Japanese issuances remain important to the ILS ecosystem,” the report said. “The market continues to show signs of strength, with recent deals achieving significant capacity and favourable pricing at the low end of initial guidance. With continued expectations of a growing capital base (both as a result of premium earnings from fixed coupon payments and from additional money raised), sponsors are planning for year-end issuances to take advantage of growing investor interest.”
It added: “The sidecar market also demonstrated resilience by returning to growth after two consecutive years of decline. Over the last year, outstanding sidecar volume increased to $7.1 billion from $6.4 billion in 2022.
“While this level remains below the peak outstanding volume of $8.4 billion achieved in 2015, positive issuance trends are emerging to match the general pricing trends in the reinsurance market. Growth this year resulted from the expansion of existing sidecars as well as the establishing of new sidecars, prompting the return of past ILS investors who had temporarily left the proportional market during years of softer rates.
“Interest in the sidecar sector is escalating as investors recognise the mutually reinforcing impacts of higher pricing, more remote attachments, and restricted coverage.”