ILS market yet to catch up on post-Ian cat bond mispricing: Twelve Capital

Cat bond issuance should continue to offer highly attractive pricing through the first quarter as investor appetite lags sizeable issuance and lingering post-Ian market mechanics depress pricing, analysts at Twelve Capital have argued.

“Twelve Capital also expects the attractive pricing environment to persist well into the new year,” analysts wrote, citing the end-2022 impact of spreads on pricing, broker talk of pending issuance, including of pending maturities.

“Yet, we would also expect some normalisations in premiums towards the end of the issuance window in the second quarter, as more capital finds its way into the ILS market.”

Risk adjusted cat bond yield did nothing but rise in 2022, heading from low single digits to 12.8% in the recent reading.

A huge portion of cat bond losses following Hurricane Ian were tied to spreads, not fear of losses, Twelve Capital noted.

“The spread widening, which was felt across primary and secondary markets, has left to sometimes sever markdowns even of bonds completely unaffected by any of the recent catastrophe events,” authors noted.

And where fear of losses had driven market declines, a wide swathe of the concern abated.

The steepest immediate post-Ian losses were amongst indemnity-triggered cat bonds from individual primary carriers. Index-linked bonds tied to overall industry were considered safer on attachment points above expected loss.

In the event, some key indemnity-tied cat bonds recovered handily. In particular, the FloodSmart deals from the National Flood Insurance Programme (NFIP) covering US flooding risk enjoyed relief as NFIP claims counts flowed in at low levels.

Index-linked cat bonds, comparatively utilized as retrocession tools, suffered only moderate losses post-Ian, but have shown little sign of notable recovery.

Did you get value from this story?  Sign up to our free daily newsletters and get stories like this sent straight to your inbox.