Cat bond market resilient through macroeconomic headwinds: Aon

Despite the significant macroeconomic headwinds that posed a threat to investor capital and impacted most financial markets through the second-quarter of 2022, the catastrophe bond market was resilient by comparison, with the period seeing its third-highest volume of new cat bond issuance.

This is according to Aon Securities, the capital markets, catastrophe bond and insurance-linked securities (ILS) specialist investment banking unit of the insurance and reinsurance broker.

In commenting on the second-quarter of the year, Aon Securities noted that, “Rapidly increasing inflation, rising interest rates and costly currency hedges posed as significant threats to ILS investor capital at the beginning of the quarter.”

However, “Although these macroeconomic headwinds continue to encumber most financial markets, the cat bond market persevered,” the broker dealer added.

The appetite of cat bond investors for coastal US wind risk, which made up around a third of the second-quarter issuance, demonstrated the importance of the ILS market during the challenging June 1st reinsurance renewal season, Aon Securities noted.

The company notes that second-quarter cat bond issuance levels, being the third-highest for the period on record, were “a major success”, but might not have been possible “without the rate hardening that transpired.”

Aon Securities explained that, “Given the volume issued against the available capital, investors were able to be more selective with their investments.

“This inclination not only widened spreads, but also gave investors additional momentum in their push for more favorable terms such as the inclusion of franchise deductibles and wider reset factors.

“Overall, rates widened approximately 10 – 20% dependent on the peril and structure of the transaction, moving in tandem with traditional and other alternative reinsurance markets.”

It’s certainly true that if reinsurance rates had not hardened so much, it may have been far more challenging for cat bond fund managers to raise the necessary capital to support the deals that got issued.

This is going to make for interesting dynamics going foward, as it’s not yet clear whether higher-spread levels can be sustained, or will come down as we move through to the next period of more active cat bond issuance.

You can access all of Artemis’ catastrophe bond market reports here.

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