Early ILS issuers post-Ian laying tracks for robust market from Q2: Aon

The insurance-linked securities (ILS) market has gathered some momentum into the first quarter of 2023, with a handful of intrepid issuers able to take advantage of their relative scarcity to close their deals at size and even narrow spreads that had flung wide after Hurricane Ian, global insurance broker  Aon said in a report drumming up the outlook for the market.

“Initial indications suggest a positive shift in momentum across the market,” Aon analysts wrote.

But what Aon calls momentum has yet to turn the flywheel: Rather, the continuing post-Ian drought has created something of a sellers’ market where a handful of successful deals could snowball into a more robust market late Q1 and beyond.

“With the early year pipeline smaller than anticipated, maturing issuances not entirely matched with new capacity and investors experiencing capital inflows, Q1 2023 sponsors of cat bonds have benefited from positive execution, both from a pricing and size standpoint.”

“Such market signalling is sure to bolster the cat bond pipeline through the end of Q1 and into Q2 as sponsors continue to seek alternate capital solutions,” Aon argued.

Deals are being done at notable spreads against the backdrop of a market that sold off after Hurricane Ian well in excess of the damage Ian likely could have dealt to principal, Aon noted.

The likely principle loss from Hurricane Ian looks entirely "manageable," but the mark to market post-storm move in spreads was "clearly much larger than the potential principal losses alone," a fact outwardly reflected in Q4 issuance pricing. Aon counts the cat bond market down 6.8% from the week prior to Hurricane Ian through February 10.

Aon counts catastrophe bond issuance spreads widened by upwards of 50% for both indemnity transactions for insurance companies and also industry loss catastrophe bonds for reinsurers, analysts noted.

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