The catastrophe bond market has experienced a record level of issuance in the first half of this year, according to a recent report by Moody’s. The report states that the total issuance reached $10.3 billion by mid-August, surpassing the $10 billion mark for the entire year of 2022. This surge in issuance is expected to drive future growth in the insurance-linked securities (ILS) asset class.
The growth in the catastrophe bond market was primarily driven by the property cat space, with mortgage ILS issuance remaining subdued due to uncertainty in the housing market. Moody’s predicts that this trend will continue in the near future. The report highlights that investors sought higher expected returns in the wake of several higher-than-average catastrophe loss years, which led to an increase in cat bond spreads.
In addition, higher interest rates and more restrictive coverage terms contributed to investor demand. Moody’s expects inflation and high reinsurance prices to support cat bond issuance for the remainder of the year. The availability of alternative capital will also influence future pricing levels in the market.
The report also indicates that pricing varied across different perils and structure types in 2023. The investor base demanded more risk premiums for annual aggregate coverages compared to occurrence-based coverages to compensate for the increased frequency of severe convective storms and wildfires in recent years.
Overall, the pricing for cat bonds, as measured by the risk premium divided by expected loss, has been trending higher in line with improved pricing in the traditional reinsurance market, according to Moody’s.
The strong performance and increased issuance in the catastrophe bond market are positive signs for the insurance-linked securities asset class. As the market continues to grow, it provides investors with opportunities to diversify their portfolios and access better risk-adjusted returns. However, it is important for investors to carefully assess the risk factors associated with catastrophe bonds and consider the potential impact of natural disasters on their investments.
In conclusion, the record level of issuance in the catastrophe bond market during the first half of this year is expected to drive future growth in the insurance-linked securities asset class. The property cat sector has been the main driver of this growth, while mortgage ILS issuance has remained subdued. The pricing of cat bonds has been influenced by several factors, including higher expected returns, interest rates, coverage terms, and the availability of alternative capital. As the market continues to evolve, investors should carefully analyze the risk factors and opportunities presented by catastrophe bonds.