Aon: ILS market poised for record-breaking 2023 issuance driven by AUM growth

The ILS market is on track for record-breaking new issuance in 2023 following a strong first half, according to a new report from Aon, with investor AUM up more than $5bn since the end of 2022, while new and returning sponsors have come to market.

In its newly-released ILS annual report, Aon noted that the first half saw record breaking issuance volume, with a total notional issued amount for 144A property cat bonds of $9.7bn.

The issuance volume, issuance count and number of clients as of the end of the first half of the year have all already exceeded 2022 full-year levels.

Aon said this indicates a “full recovery following the impacts of Hurricane Ian”.

In an introduction to the report, Richard Pennay, CEO of ILS for Aon Securities, commented that the ILS market over the past year has been “one of great contrasts” between the second half of 2022 and the first half of 2023.

He said this was partially due to the broader economic concerns related to inflation and the war in Ukraine, which were then exacerbated by Hurricane Ian.

Pennay said that Ian amounted to material mark-to-market losses and a lack of investor appetite in the fourth quarter.

“2023 to date has proven to be a much better year for both investors and issuing companies,” he said.

“Investors have benefited from catastrophe bond returns greater than anything experienced over 20 years. Secondary spreads tightened as principal losses associated with hurricane Ian failed to materialise in a significant way, resulting in mark-to-market gains.”

Investors have generated double-digit returns as of the end of the first half of this year.

“Higher returns have fuelled further capital inflows, helping to absorb the rising demand for catastrophe bond capacity from sponsors. To date, the ILS market has executed over $10bn of new issuance, with the market well on track to be the largest issuance year on record,” Pennay said.

Q2 a record quarter after slow start to year

In the report, Aon outlined that the year started slowly, but the second quarter turned into the largest quarter issuance that the cat bond market has ever seen.

The broker said that the heightened spreads that persisted through the end of 2022 and into the beginning of this year “created an ideal environment for investors to raise capital”.

Investor assets under management (AUM) has increased more than $5bn since the end of 2022. This has resulted in more than $3.6bn of cat bond market growth as of the end of June, an approximate 10 percent increase from year-end 2022.

“Growth in AUM – resulting from both investors’ successful capital raises and reinvested premium earned on outstanding issuance – is poised to result in record-breaking issuance volume for 2023,” the report said.

Spreads began to tighten in the first quarter of this year as a result of the abundant capital flowing into the market and the lack of losses materialising from Hurricane Ian and other events in the second half of 2022 and into this year.

Aon noted that the tightening spreads were welcomed by sponsors facing heightened pricing in the reinsurance and retrocession markets, although cat bond prices remain at historically elevated levels.

Both indemnity and index cat bonds saw new issuance spreads tighten between 15 percent and 35 percent from the first quarter of this year to the second quarter for US property cat bonds.

At the half-year stage of 2023, the market had $38.6bn of outstanding cat bonds, which Aon said further demonstrates market growth and the value proposition that investors see in this class.

Cat bond issuance sizes in H1 2023 were up 63 percent on average compared with the second half of 2022, to levels consistent with issuance sizes prior to Hurricane Ian.

Aon said that a diverse group of returning and new sponsors have come to market year over year with broad risk profiles that capture varying ranges of loss, regions of coverage and trigger types.

Of the new issuance between July 2022 and June 2023, the concentration of risk remained largely triggered on an indemnity basis, with 66 percent of total issuance. Industry-loss triggers accounted for 29 percent of the notional issuance, and parametric triggers for 5 percent.

“As in prior years, the risk is driven by US perils, although European and Japanese issuances remain important to the ILS ecosystem,” the report said.

Aon said that the cat bond market continues to show signs of strength, with the broker noting that recent deals achieved significant capacity and favorable pricing at the low end of initial guidance.

“With continued expectations of a growing base (both as a result of premium earnings from fixed coupon payments and from additional money raised), sponsors are planning for year-end issuances to take advantage of growing investor interest,” the report said.

Aon noted in the report that the percentage of indemnity aggregate issuance volume has gradually declined since 2017 and 2018, where it peaked at over 50 percent of indemnity issuance.

For the year ending 30 June 2023, 43 percent of indemnity issuance was on an aggregate basis and 57 percent on an occurrence basis.

Aon said that “this trend is in line with market consensus that risk takers have become more sensitive to attritional losses from secondary perils”.

Discussing the secondary ILS market, Aon noted that the fluctuating spread levels in the primary market from July 2022 to June 2023 was also reflected in the secondary market, particularly in response to Ian.

Sidecar market returns to growth

Aon also reported that the sidecar market demonstrated resilience by returning to growth after two consecutive years of decline.

Outstanding sidecar issuance volume increased to $7.1bn over the past year, compared to $6.4bn in 2022. This remains below the peak outstanding volume of $8.4bn in 2015.

Aon suggested that “positive issuance trends are emerging to match the general pricing trends in the reinsurance market.”

This year’s sidecar growth came from the expansion of existing sidecars as well as new sidecars being established, which has prompted the return of past ILS investors that temporarily left the proportional market during the years of softer rates.

“Interest in the sidecar sector is escalating as investors recognise the mutually reinforcing impacts of higher pricing, more remote attachments, and restricted coverage,” the report said.

Aon added that opportunistic investors are once again researching the sidecar sector while strategic investors continue to carefully review their portfolios.

Aon’s feedback on the ILS market follows Swiss Re’s report last month that also highlighted the record-breaking first half for issuance and suggested 2023 could turn out to be a record year.

The reinsurer said that sponsors “found the cat bond market as a great alternative but an even better complement to a hardening traditional (re)insurance market”.