Cat bonds now much more attractive to potential sponsors: Steiger, Icosa

The catastrophe bond market continues on a positive trajectory in 2024, with robust demand on both sides of the trade, but with spreads and yields having become more “normalised” in recent months, cat bonds are now much more attractive to potential sponsors, Florian Steiger, CEO of Icosa Investments has said.

The significant demand for catastrophe bonds so far this year in both primary and secondary markets from investors has driven moderate increases in cat bond prices.

But, despite this, Steiger of Icosa Investments notes that spreads are still “significantly above their long-term average,” which he believes means 2024 will have a “continued positive outlook for the remainder of the year.”

The increased demand being seen for cat bond investments has also negated some of the off-season effects that would typically be seen, which has allowed investors to achieve excess returns over what would normally be considered an adequate risk premium.

Steiger further explained, “The mentioned price increases have normalised spreads in the cat bond market over the past months. The record-high levels of last year, where spreads sometimes exceeded 1,000 bps, are unfortunately no longer achievable.

“However, it’s worth remembering that these high spreads were accompanied by very low market liquidity, and investors had little opportunity to acquire significant volumes at these conditions, as no one was willing to sell at such prices.”

As a result, Steiger feels the more normalised spread levels now seen, of around 700 bps in the overall cat bond market, “is healthy for the market in the mid- to long-term.”

“With the reduction in yield levels, cat bonds have become much more attractive to potential sponsors, leading to a significant increase in new issuance volumes,” Steiger said.

Adding that, “Trading activity in the secondary market has also increased substantially, allowing capital inflows from new investors to be absorbed more easily.”

With greater liquidity to absorb investor capital and a strong forward pipeline of new catastrophe bond issues, as can be seen in the Artemis Deal Directory, the market is in a good position to continue to expand through the coming months.

The attraction for sponsors is clearly seen in that market pipeline, with both new and repeat sponsors bringing numerous cat bonds so far this year.

Steiger further explained that, “The first quarter also saw an infusion of fresh cedents into the market, broadening investment choices and enabling further portfolio diversification.

“Notably, the bulk of new issuances were indemnity bonds, overshadowing index-linked or parametric structures. This diversification enhances our ability to invest in cat bonds with unique risk profiles and potentially higher returns.”

While the pricing effect seen in recent months has reduced the overall yield of the catastrophe bond market, Steiger says that the asset class remains very attractive.

“Despite lower spreads compared to last year’s record levels, yields in the cat bond market remain well above their long- term average and significantly above the risk, measured by the Expected Loss. Therefore, cat bond investors can expect an attractive performance for 2024, barring any significant catastrophes,” he said.

“The surge in new issuances, coupled with strong premiums, fuels our optimism for the months ahead. Absent significant catastrophes, we anticipate this momentum to support performance generation, potentially reaching well into double-digit gains for the year 2024.”

You can analyse the catastrophe bond market yield over time using this interactive chart.