A recent report from Moody’s highlights the record level of issuance seen in the catastrophe bond market during the first half of the year, which, at $10.3 billion, is expected to drive future growth in the bond-linked asset class. insurance (ILS).
As of mid-August, catastrophe bond issuance had surpassed $10 billion for all of 2022, Moody’s notes, and was “propelled” by higher expected returns thanks to “better catastrophe pricing real estate for decades.
Much of the growth has been driven by the real estate sector, with mortgage ILS issuance remaining subdued this year, a trend that Moody’s expects to persist given the uncertainty that reigns over the real estate market.
As the ratings agency noted, catastrophe bond spreads have soared over the past year as investors need higher expected returns after several years of above-average catastrophe losses.
“Higher interest rates and more restrictive hedging conditions have also contributed to investor demand. We expect inflation and high reinsurance prices to support catastrophe bond issuance for the remainder of the year. Ultimately, the amount of alternative capital available will influence future price levels,” Moody’s added.
In 2023, prices varied depending on risk types and structures, the company explains. The investor base has demanded higher risk premiums for annual blanket hedges compared to event-based hedges, to compensate for the increased frequency of severe convective storms and wildfires in recent years.
“The price of cat bonds, as measured by the risk premium divided by the expected loss, continues to rise in line with improving prices in the traditional reinsurance market,” Moody’s concluded.
