2 days ago
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A renewed interest in catastrophe bonds is being seen across the insurance-linked securities (ILS) market, as spreads have started to become more “attractive”, which indicates a favourable market entry point for new sponsors, according to Sandro Kriesch, Head of Insurance-Linked Securities (ILS), and Sophie Worsnop, Assistant Vice President, Acrisure Re Corporate Advisory & Solutions (ARCAS).
The reinsurance broker recently conducted a study, exploring how spreads for cat bonds that were issued throughout 2024 have gone on to develop, however the firm primarily focused on just US wind exposed bonds.
“As 2023 calendar year closed, final spreads exhibited a slight upward tendency in comparison to the initial spread guidance, indicating an anticipation of a hard underlying market,” Kriesch and Worsnop said.
“The first quarter of 2024 shifted towards a softer market, followed by a return to a harder stance in the second quarter, culminating in a substantial hardening at the end of Q2. Notably, some issues were not placed due to high pricing expectation during May and June (Titania 2024-1 Class B and Gateway 2024-3).”
When it comes to the fourth quarter of 2024, it’s important to highlight that no publicly available US hurricane exposed issues were observed during October, therefore ARCAS’ analysis only focused on the months of November and December.
According to Kriesch and Worsnop, these months exhibited a “very different picture”, where the final spreads were materially lower than the initial spread guidance mid-point, which signals a clear market softening.
“The factors contributing to the shift in sentiment are somewhat speculative, but we present two suppositions: 1) rumours of a softening in the underlying traditional reinsurance market, leading to an expectation of reduced pricing in cat bonds from buyers, and moreover 2) an approximate 2.5bn USD of maturing issuance during Dec 2024 and January 2025, driving investor interest and thus concessions on pricing reductions,” commented Kriesch and Worsnop.
“As more data from the 1/1 renewals becomes available, the 10% decline of final spread to initial spread guidance in both November and December becomes better contextualised within the broader reinsurance market, demonstrating the strength of the marriage of cat bonds with the underlying traditional placements.”
We discussed this in our latest quarterly cat bond report, where it showcases that on average, across the 29 tranches of notes that we have full pricing data for, all but three saw their final spread come down from the mid-point of initial guidance, which resulted in an average spread change of -10.8%.
Furthermore, Kriesch and Worsnop also explained how the broker’s study addressed how the perception of risk changed between the first half of 2024 to the fourth quarter.
“We observe two aspects during this period. First, the intercept: the price for capacity has come down substantially – actually significantly at the 99% level – and secondly, the slope: the risk sensitivity has roughly remained stable, indicating a continuous sensitivity to more (or less) risk (we also see a significant overall shift between the samples.).
“Thus, we would argue that the market for US Wind exposed cat bonds has become softer in terms of its pricing. In simple terms: sellers of capacity are generally willing to accept risk at lower spreads. It is worthwhile noticing that the 4Q24 sample is strongly aligned in that (with one exception) bonds’ spreads are priced very closely to the regression suggesting an agreement in principle of how risk should be remunerated; on the other hand, the 2H24 sample represents a market which seemed much more unsure regards the fair price of ceded risk as data is much more dispersed.”
They both went on, explaining that the firm used spread changes from initial guidance to final spread and the regression of expected loss vs spread of US hurricane exposed cat bonds during 2024 as “indicators of a softening market.”
“The latter shows strong changes supporting the change in risk sensitivity during that period towards a softer Cat bond market. On the other hand, the difference in final spread and initial spread guidance showed a clear change from May 24 to December 24.”
Adding: “The sizeable spreads that were paid led to some companies pulling (or postponing) their issue – however, come Nov/Dec 24 spreads are now much more benign.”
“We are encouraged by the renewed interest in cat bonds, not only because the spreads have become more attractive but also because the recent catastrophic event in California has highlighted the potential for unexpected capacity shortages in the traditional reinsurance market,” Kriesch and Worsnop concluded.
English (US) ·