Cat bonds on-track to match records in 2022, fresh capital expected: Aon

Mid-way through 2022, the market for catastrophe bonds is on-track to match the record levels of issuance seen in 2021, according to insurance and reinsurance broker Aon.

Demand for catastrophe bonds from established insurance-linked securities (ILS) funds and investors continues to outstrip supply in the market in recent weeks, Aon’s Reinsurance Solutions division explained.

“Insurers and reinsurers increasingly turn to alternative capital markets to supplement traditional reinsurance and maximize placements in a challenging environment,” the broker said.

Following the record cat bond issuance of 2021, the first-half of 2022 has been more challenging.

Aon explained that, “Insurance-linked securities (ILS) investors paused to re-evaluate their view of overall asset allocation during a period of geopolitical, macroeconomic, and financial markets volatility.”

Because of this investors have been far more choosy about which new cat bonds they have supported, which caused some new deals to be pulled, a number to be downsized, while pricing rose significantly.

“ILS investors, which have endured higher catastrophe losses in recent years, have been more selective and pushed for improved structural terms and pricing,” Aon said.

However, despite the constraints on capital in the cat bond and ILS space, many re/insurers “were able to close transactions within expectations,” the broker continued.

Existing sponsors fared better in the main, the broker explained, adding that, “Experienced brokers were able to leverage investor relationships and adjust structures to secure investor support and more favorable terms and conditions for clients.”

Right now, the forward pipeline for new catastrophe bond issuance “remains robust” according to Aon, as a result of which the reinsurance broker believes, “The catastrophe bond market remains on track to match last year’s record issuance.”

Things should settle down, in terms of capital and investor appetite, Aon seems to believe, a sentiment many in the market now share as the pipeline has slowed for the beginning of hurricane season at this time, allowing funds and investors to catch their breath and plan for adding more capital.

“We expect the current uncertainty in the ILS market to be relatively short-lived,” Aon explained, adding that it expects that, “New investors and fresh capital will be attracted to the market.”

More capital is going to be needed to help the cat bond market set new records, as maturities alone will not provide the necessary liquidity.

At a time when sponsor demand is elevated and perhaps rising, the cat bond market has an opportunity to expand further through the second-half, having already grown through the first six months of 2022.

Overall, Aon said, the motivations for investors haven’t changes and the market for catastrophe bonds and other ILS continues to offer investors, “Value and diversification throughout the financial markets cycle.”

You can access our brand new catastrophe bond market report here.