Cat bond flurry toys with record in Q2 even as spreads tighten

The catastrophe bond market appeared on track to put Q2 2023 on the podium for top issuance volumes on the way to a potential record for FY2023 even as some of the margin gain is being pared, officials at  Aon have declared.

“2023 is tracking towards a record year,” Aon’s head of Business Intelligence Mike Van Slooten and the CEO of Aon’s ILS business Richard Pennay (pictured) wrote in Aon’s mid-year renewals summary. They expect “a vibrant marketplace through the remainder of 2023.”

Spreads remain elevated versus prior years “and have proven to be attractive to end-investors” and institutions aggregating investor demand in the segments “have been successful in raising additional funds for catastrophe bond strategies both from existing and new ILS investors.” Investors are also happy to lap up the higher base return on collateral in the new interest rate environment, authors add.

“While risk more broadly has been repriced over the past 18 months or so, catastrophe bond investors have benefited from higher margins, floating rate returns, and the relatively short duration and diversification benefit of the asset class,” authors said of the total upside gain.

But the spread side of the equation is tightening of late in 2023. Primary market pricing has seen a roughly 40% tightening for industry index issuances since the beginning of the year. May and June issues are now priced tighter than deals seen June-July 2022, just ahead of hurricane Ian, “illustrating a quantifiable return to pre-Ian pricing dynamics.”

Total issuance now exceeds $8.6 billion year-to-date and had already pushed the total ILS funding count over the $100 billion mark by end-Q1, despite stagnation in collateralised deals.

During the second quarter, April hit an all-time issuance record at over $2 billion, May shared the podium at over $3.2 billion

“While several deals are still being marketed at the time of this publication, we anticipate June will also close out one of the largest quarters we’ve seen with respect to total issuance volume historically,” authors added.

In addition to offers from existing issuers, often replacement deals, seven new sponsors entered the cat bond market including Conduit Re, Korean Re and Toka Tū Ake EQC, the New Zealand Earthquake Commission.

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