Cat bond market on course for record year as H1 issuance hits $12.3bn
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Cat bond market on course for record year as H1 issuance hits $12.3bn

Cat bond spreads stabilised as maturities brought capital to deploy into the market, after an earlier spike.

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New cat bond issuance reached $12.3bn in H1, comfortably outpacing the $10.1bn of volume issued as of mid-year 2023, according to data tracked by Insurance Insider ILS.

Some $8.2bn of volume was placed in Q2, the largest quarter for issuance in the market, ahead of last year’s record second quarter at $6.9bn.

Market sources remain confident that the sector is on track to surpass 2023’s record year of $15.8bn of new issuance.

Three “mega” cat bond deals that placed in Q2 helped drive the total H1 issuance.

The Texas Windstorm Insurance Association (Twia) secured $1.4bn of limit for its Alamo Re cat bond, while Florida Citizens’ Everglades Re bond placed at $1.1bn in size, and State Farm’s Merna Re raised $1bn.

There were also five first-time sponsors in Q2, including the Government of Puerto Rico and GPC Partners Investments Corporation. Some carriers also returned after a long absence, such as residual insurers in Massachusetts and North Carolina.

The driver for new and existing sponsors to secure additional limit was primarily the impact of economic inflation on exposures, market sources suggested.

“Growing exposures, largely as a result of inflation, pushed cedants to transfer more risk to the capital markets to support their growing books,” according to one cat bond market source.

Investors nervous about forecasts

Spreads climbed during Q2, rising by 12% to 921 basis points (bps) on a weighted average basis, compared to 822bps in Q1.

On average, spreads in Q2 this year were the highest they have been since Q1 2023. [Click here for select market activity metrics.]

The higher spreads reflected a risk-adjusted shift upwards in Q2 as average multiples rose to 4.7x from 4.2x in Q1. Some level of step-up often occurs from Q1 to Q2 given the typical focus on higher-yielding hurricane deals just before wind season.

However, timing issues also influenced the initial Q2 spread increases.

Spreads spiked in April and May as market dynamics shifted such that the supply of product began to outweigh demand, as managers found themselves short of capital to support a busier-than-expected pipeline.

The volume of new deals outpaced maturities in April and May, as maturities were only around $2.3bn in this period.

Florian Steiger, CEO at Icosa Investments, said: “Q2 issuance was as expected, but some deals came onto the market earlier than usual.”

One such deal was Twia’s mega-bond Alamo Re, which entered the market in early April, but has entered toward the end of May or early June in the last two years.

With this year’s Alamo Re bond almost 3x larger than 2023, it is likely that this – along with other deals coming to market slightly earlier than usual – as well as capital constraints on managers, tipped the balance in the market at the start of Q2.

Cat bond market sources suggested that several factors were at play leaving managers short of capital by April, citing capital flow problems, hurricane forecasts and a lack of maturities.

Sources noted that one dynamic was that managers had invested heavily into March issuance, after a quiet pipeline of deals in January and February, leaving them short of capital for April issuance.

Weather forecasters are also predicting an extremely active hurricane season, with the consensus for activity well above the five, 10 and 30-year averages for major hurricanes, hurricanes and named storms.

“Investors are paying attention to the forecasts, with some investors who were eyeing the asset class holding off,” one source commented.

“Despite the strong returns available for cat bonds, investors are wary about the hurricane forecasts,” another source said.

Spreads began to stabilise in June

Spreads began to stabilise in June as the pipeline slowed down and the volume of maturities grew. Some $1.7bn of deals expired in the first two weeks of June.

One cat bond market source said: “Most managers were relying on maturities to invest in the new issuances.”

As a result, spreads on average settled within the guidance range for the quarter.

In Q2 last year, spreads settled below guidance, on average. Despite the April and May rate increases, cat bond multiples remain down year on year.

Average multiples were down to 4.7x in Q2 2024 vs 5.7x in Q2 2023.

This came as expected losses on deals coming into the market were higher on average in Q2 compared to Q2 2023.

Expected losses on indemnity deals were 2.0% on average in Q2, around 13% higher compared to Q2 last year.

Expected losses on index deals were 2.7% on average, around 22% higher in Q2 this year compared to the prior year quarter.

Spreads widen faster on index bonds

One trend that unfolded during the quarter was that spreads widened more rapidly on index deals than on indemnity deals.

Spreads on indemnity bonds increased by 8% to 901 bps in Q2 from Q1.

On index deals, however, the spread uplift was more marked, increasing by 23% to 994 bps on a weighted average basis.

Index-based deals comprised a smaller portion of the total market in H1 this year compared to H1 2023, however sources noted that capital constraints have been more acute for managers having index-only mandates.

Insurance Insider ILS reported in May that redemptions of index-only mandates were understood to have pushed managers to sell positions on the secondary market in order to free up capital.

Market sources also noted that RMS v23 model update had pushed up expected losses with the effect of driving up prices on index-based bonds.

However, others countered that the impact of the model update was being overplayed by managers, and that its effects had already been felt in the market over the past year.

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