Catastrophe bonds are experiencing a “wave of demand” according to Aon Securities, which has now resulted in spreads falling by 20%, returning to levels last seen in early 2019.
The capital market unit of insurance and reinsurance broker Aon noted in a recent report that new capital inflows into insurance-linked securities funds (ILSs) have put pressure on bond spreads. cat.
This, in addition to the more than $ 2 billion in maturing Cat bonds from which capital had to be reinvested, caused the “wave of demand” from investors for catastrophe bonds in the first quarter of 2021.
The observed issuance, lower than the previous year, was not sufficient to meet investor demand for cat bonds, leading ILS funds and investors to turn to the secondary market, where demand weighed on spreads, Aon Securities reported.
Commenting on the secondary market conditions for catalytic bonds in the first quarter, Aon Securities explained, “The market was mostly one-sided as investors looked to put money into the money, and all completed trades were executed through the market. offer.
“As the quarter progressed and the primary market reopened, more offers came in and trading gradually increased, but remained fairly calm compared to previous quarters.”
With too much demand and insufficient supply in the primary market, cat bonds in the secondary market came under price pressure as ILS investors and fund managers sought to make the money grow in the first quarter.
As we have documented as new cat bonds are also issued in the second quarter, demand-side pricing pressure has also lowered issuance spreads, while secondary brands also remain under pressure.
Right now the average multiple in the newly issued Catastrophe bond market is back to the levels last seen in early 2019 as we reported and you can see in our data and charts.
Aon Securities reports that the same is being seen in the secondary market for cat bonds, where “spreads have tightened to levels last seen in early 2019 and are down around 15-20% on average from off last year which was the result of the initial COVID. -19 epidemic ”, in the first quarter of 2021.
Overall, the catastrophe bond market has tightened, Aon Securities said, and the company believes this will likely continue over the next several months as a significant amount of maturing capital is returned to bond investors. catalytic.
Once again, supply does not keep up with demand in the catastrophe bond market, which eases both the prices of newly issued bonds and the prices of bonds in the secondary market.
Whether this easing spill over into broader reinsurance prices remains to be seen, but it makes cat bond-backed reinsurance protection more affordable for sponsors, given the strong execution seen with recently issued deals.