This came as fears of over-capacity for index deals eased, structural benefits were rolled back in some instances, and multiples held up despite gross yields falling.
Meanwhile, Q2 volume, at $5.3bn, is already $500mn ahead of last year.
This suggests the market is on course to match or exceed 2021’s record of $12.7bn for cat bond issuance in a single year, with several sources tentatively calling the possibility of a record year of issuance.
At the turn of the new year, the general expectation was for the challenges of 2022 continuing through 2023, particularly the anaemic inward flow of new capital to the market and the real risk that deals might not get away smoothly or even at all.
However, as it turned out capital began flowing in from around February, attracted by higher rates and stronger terms and conditions, and sponsors were able to use this to push on pricing.
Among those raising fresh capital, Fermat signalled as early as March that it had already pencilled in $1bn of commitments, and Legal & General Investment Management entered the market for the first time with direct allocations to bonds totalling $350mn-$400mn in H1.
There was also around $5bn of past deals coming off risk in H1, which added to capacity overall, although this was in line with $4.9bn that came off risk in H1 2022.
Several new sponsors came forward in H1
Meanwhile on the demand side, dislocated pricing in the traditional reinsurance market also helped to drive sponsors toward cat bonds.
The deals coming out included a lively procession of offerings from first-time sponsors including Conduit Re, Korean Re, New Zealand Earthquake Authority and Spinnaker.
The NZEA stood out for bringing an entirely new peril to the cat bond market, securing NZ$225mn ($136mn) of limit, having worked through currency issues with investors and settling on IBRD notes as a suitable collateral solution.
Shiv Kumar, president and global leader of GC Securities, summed up H1 market sentiment: "Investors’ willingness to support the strong pipeline and allowing transactions to upsize and price towards the lower end of the guidance sent a very encouraging signal to the cedant companies about the value of continuing to use ILS within their risk transfer framework," he said.
Pricing came off the high of Q4 last year
All but five deals priced below initial guidance in Q2, leading some sources to complain of a lack of discipline, just at the point when prices had stepped up and terms and conditions had tightened.
The quarterly weighted average price of a deal came off by 29% to 846 basis points (bps), down from the high of 1,184 bps in Q1 2023, according to Trading Risk analysis.
However, with a drop in expected losses on new issuances across the market in that timeframe, the multiples over the expected loss have actually held up – at 5.3x in Q2, vs 4.8x at the start of the year.
In Q2 this year, 83% of volume was issued with an expected loss of 2% or lower, compared to 62% of volume in the same low expected loss bracket in Q2 last year.
Index deal mandates have used up their capacity
Concerns aired in the springtime about “very aggressive” buying behaviour targeting index deals have eased.
A source said: “The prevailing market view is that capacity focused on the index mandate might be nearing an end, so any new deals might not be awash with capacity.”
This capacity is believed to have contributed to prices settling toward the lower end of, or below, guidance on index deals such as Munich Re’s Queen Street Re bond, Conduit Re’s Stabilitas Re and Korean Re’s issuance Solomon Re.
The majority of deals also placed either on or above their target limit size, with the state of North Carolina’s residual market, North Carolina Insurance Underwriting Association (NCIUA), upsizing its named storm Cape Lookout Re bond by $150mn to $350mn.
Deal feature gains generally held up
Gains on extension spreads made last year that were favourable to investors have started gradually to be rolled back, on “a broker-by-broker basis”, according to some sources.
The increases to extension spreads to 3%, which sources in December told Trading Risk had made bonds “unplaceable” if they did not meet this bar, were eased to 2.5% on some deals.
A source said: “These things are not the main driving force for a sponsor, but for an investor we want to know if something goes wrong, how badly could it go?”
However, other sources suggested that the trend for higher extension spreads had generally held up in favour of investors.
Other improvements to deal features continued moving in investors’ favour. The shift from franchise deductibles to event or “hard” deductibles was implemented on more bonds this year, including on the latest Sanders Re bond from Allstate, according to sources.
Sources also noted inflation adjustment of exposures, and the generally narrower set of well-modelled, named perils, occurrence-based covers.
However, investors continue to raise issues about aggregate deals. One source summed up the general sentiment, saying that “everyone knows that they are not properly modelled.”
Another said that modelling was “not as well calibrated to capture all of the losses”, for high frequency, lower severity perils like severe convective storm, wildfire and flood.
As a result, investors are making their own adjustments based around region, risk, compliance issues, claims record and economic inflation.
A source said, “it’s beholden on investors to figure out their own view of risk.”
