Catastrophe bond spreads to stabilise as supply expands: Sangiorgio, Twelve Capital

The increased supply of new catastrophe bonds into the market through the first-quarter and the growing pipeline into April will help to stabilise cat bond spreads, Twelve Capital’s Head of Investment Solutions Vittorio Sangiorgio has said.

In 2024 so far we’ve seen a significant amount of maturities and also some investment managers had excess capital to deploy, which alongside growing investor interest and new inflows to cat bond funds, has meant catastrophe bond spreads coming under pressure.

But the strong levels of new issuance seen so far should all help to counteract the effects of cash in the market from maturities and the new capital raised, resulting in a stabilisation of supply and demand.

Vittorio Sangiorgio, Head of Investment Solutions at specialist investment manager Twelve Capital, explained that the growing cat bond new issuance pipeline is expected to help the market expand further as well.

“Following some maturities in January we now see an active primary market with a lot of indemnity bonds coming as opposed to index linkers,” Sangiorgio said.

“The Cat Bond market is not only on a record high level of almost USD 45bn but also expected to grow over the next 9 months.”

This increased issuance activity is a driver for a stabilisation of prices in the market, Twelve Capital believes.

You can analyse catastrophe bonds issued and in the pipeline using the Artemis Deal Directory, while our range of charts and visualisations helps you break-down the market and look at cat bond pricing trends.

Already, the first-quarter is the second most active for cat bonds that have settled and will break the quarter record when all deals have completed in the coming days.

“One result of maturities was a further spread tightening, especially for index linkers,” Sangiorgio continued to explain.

Adding that, at Twelve Capital, “We anticipate that we have reached the bottom and expect spreads to stabilise, due to the above-mentioned increase in supply.”

Just last week, Sangiorgio’s colleague Etienne Schwartz, Managing Director and Head of Investment Management at Twelve Capital, said that catastrophe bond spreads are still attractive despite the recent tightening seen.

So, a stabilisation at current levels would still make for a very attractive market, with the yield of the cat bond market still running well above historical levels.

Investors continue to have return requirements for deploying their capital to the catastrophe bond space and there is no desire to see spreads dwindle to where they had fallen in the past.

However, as we always say, competition is the one factor that could result in a further decline in spreads, as should traditional reinsurance capital appetites build and start to compete with the capital markets, the end result is typically softening, so this is something to look out for around the renewals at the mid-year and then again next January.