Aon’s Schultz: Cat bond issuance to reach record high of $15bn in 2023
Aon Securities CEO Paul Schultz anticipates elevated cat bond activity for the remainder of the year, with total issuance reaching a potential record high of $15bn by year-end.
Speaking to The Insurer TV in New York, Schultz said Aon Securities expects higher-than-typical issuance and very significant growth in the second half of the year.
“I think where we sit today, we would say $14bn-$15bn is a number that we're pretty confident that we’ll reach as an industry,” said Schultz.
Though many factors will likely impact those figures, Schultz said from a competitive standpoint and a capital-raising perspective, the market stands to grow significantly over earlier estimates, which he had placed in the $10bn-$12bn range when speaking with The Insurer TV earlier this year.
Schultz said those figures need to be revised upwards.
He also noted the significant repricing of the market in Q1 2023, which had started in the final quarter of 2022 spurred by a number of factors.
“The market really changed on a dime,” he said. “Pressures last year, not only from losses from Hurricane Ian, but also the macroeconomic factors like inflation and FX changes, were true headwinds for the marketplace. As a result, we saw a very significant repricing of the market as we went into Q4 2022 and then continuing into Q1 2023.”
The market changes resulted in ILS managers raising more fresh capital than the industry had anticipated, with the acceleration intensifying during Q2.
“That really came about as primarily insurers were looking to continue to diversify their reinsurance panel. Everyone knows that the 1.1 renewal period was a challenging period around capacity, availability and pricing. One of the founding principles of this market is that it offers ceding clients the ability to diversify their sources of reinsurance,” Schultz explained.
These changes are expected to continue through this year and impact market conditions into next year.
“We don't have a perfect crystal ball into  yet, but we expect those trends to continue next year as well,” said Schultz.
Current conditions follow the sharp ILS losses experienced between 2017 and 2021. Schultz said the industry worked hard to rebuild investor confidence in subsequent years.
The entrenched fatigue of that era impacted all collateralised products to some extent, but unlike the booming cat bond market, the collateralised reinsurance market has been struggling to recover from prior experience.
While discussing the current ILS product mix, Schultz commented that he doesn’t anticipate the current mix “will be with us forever”.
“In the near term, we do expect more capital on a relative basis to come into the bond market, into the ILW market, compared to the other collateralised markets going forward, in large part due to some of that prior loss experience.”
Indemnity-based transactions also strayed a bit from earlier predictions. Speaking on The Insurer TV earlier this year, Schultz was cautious about framing indemnity-based transactions as a new market trend.
He said so far this year, index products have been favoured over indemnity bonds, especially from the investor side of the table.
“If you look at the spread performance for the index product versus the indemnity product, the index product has actually tightened a fair amount more than the indemnity product this year, and so it's on a relative basis more attractive for issuers to issue index product compared to indemnity product,” he explained.
That said, Schultz still predicts high demand for the indemnity product moving forward, but says the current investor preference is to sell index over indemnity capacity.
As for whether Lloyd’s will realise its ILS ambitions, Schultz said Aon is very supportive of a Lloyd’s platform for ILS capacity, noting that London is an obvious place for the segment to build out.
“Part of the reason we haven't gotten there is because it's been a journey for everybody involved,” he said.
“It's been a learning exercise for everyone involved. And probably, we haven't been as efficient in executing in London. We probably haven't been as efficient as we've had to be able to grow the issuance out of London,” added Schultz.
Looking to the future, the Aon Securities CEO expects that property will continue to be the cornerstone of the ILS market, but areas such as cyber are taking off, with Schultz anticipating more cyber cat bonds will be announced before the end of the year.
In the second part of The Insurer TV’s interview with Aon Securities’ CEO Paul Schultz, which will be published this week, we take a deeper look at the growing cyber cat bond market and other areas ILS capital is being put to work.