Despite Slow Q4, Cat Bond Market Topped 10-Year Average in 2022

While catastrophe bond issuance was below average in the fourth quarter of 2022, the year's issuance still totaled $10.5 billion, above the 10-year average, according to the Q4 2022 Catastrophe Bond & ILS Market Report from Artemis.

The total new issue volume in 2022 exceeded the 10-year average by approximately $700 million, Artemis said. The fourth quarter's subdued issue volume came on the heels of almost $9 billion in issuance during the first 9 months of 2022.

While catastrophe bond issuance was down year over year in the fourth quarter from the same period in 2021, an average number of deals came to market, Artemis reported. Meanwhile, investors pushed for higher prices amid the hardening reinsurance market.

The quarter's new catastrophe bond and insurance-linked securities (ILS) issuance included a combination of property catastrophe risk deals, privately placed transactions, and deals covering non-catastrophe exposures, Artemis said.

Together, those deals brought $1.6 billion of new risk capital to the market during the final 3 months of 2022, with more than 88 percent of that amount—$1.37 billion—providing protection against catastrophe risks across various geographies through 10 different deals.

Perils covered by fourth-quarter issues included China earthquake, unknown property catastrophe risks, US multiperil, international multiperil, US earthquake, California earthquake, and North American earthquake, according to Artemis. The fourth quarter's catastrophe bond and ILS deals also included a $150 million issue sponsored by Build America Mutual Insurance Company to cover financial guarantee risks, the report said.

Most of the 15 transactions were brought to market by repeat sponsors, according to the Artemis report, with GeoVera Insurance Holdings and PICC Property and Casualty Company being the only new sponsors in the market during the fourth quarter.

Fourth-quarter catastrophe bond and ILS issuance was down approximately $1.5 billion from the same period a year earlier, Artemis said, as well as $560 million below the 10-year average for the quarter. The report noted, however, that with the issuance during the final 3 months of 2022, over the last 10 years fourth-quarter catastrophe bond and ILS issuance topped $1.5 billion in every year but 2018.

While the fourth quarter's 15 deals were slightly above the 10-year average, the number fell well short of the 24 deals in the fourth quarter of 2021, Artemis noted. At $105 million, the average size of those deals was also down from a year earlier and well below the 10-year average of $185 million.

Regarding the number of new transactions per month during the fourth quarter of 2022, the period was typical, Artemis said. Most of the new risk capital came to market in December, while October was the slowest month of the quarter. Each month's issuance was below the 10-year average from the Artemis Deal Directory, the report said.

December was the quarter's most active month both in terms of the number of deals—12—and the volume of risk capital raised in those transactions—approximately $1.2 billion, Artemis said. November saw just three deals come to market raising $425 million, while no deals came to market in October, the third time that's happened in the past decade, according to Artemis.

The fourth quarter also saw an increase in deals' average multiple—the coupon price on the securities divided by expected loss, according to the report. Artemis found that at year-end 2022 the average multiple at issuance was 3.38, the highest it's been since 2012 and well above the 2.53 figure in 2022.

In the fourth quarter specifically, the average multiple at catastrophe bond issuance was 4.93, Artemis said, the highest seen in a single quarter since the first quarter of 2013.

"Throughout 2022, the average multiple has increased for each quarter when compared with the prior, which shows the strong pricing achieved by investors, notably after Hurricane Ian," the Artemis report said.

Artemis found a lack of diversification in the types of triggers for catastrophe bonds and ILS issues during the fourth quarter. Indemnity triggers were dominant, with $1.18 billion of the quarter's issuance—75 percent of the period's total—relying on indemnity structures. Three fourth-quarter deals—representing $340 million in risk capital—were based on industry loss index triggers, Artemis said.

Regarding perils covered by fourth-quarter catastrophe bonds and ILS, catastrophe risk dominated the quarter's issuance, the report said. In particular, earthquake risk was a focus, Artemis found, with $535 million—approximately 34 percent—of the quarter's new issues addressing North American earthquake risk. Another $32.5 million in issuance focused on China earthquake risk.

Other perils addressed by fourth-quarter catastrophe bonds and ILS included named storms in North America and the Caribbean, severe weather, US tropical cyclones, wildfires, volcanic eruption, and even meteorite impacts, Artemis said.

The fourth quarter's only non-catastrophe-risk-focused transaction was Build America Mutual Assurance Company's financial guarantee risk transaction, Artemis said.

Over the course of 2022, ILS issuance addressing mortgage risk was at its lowest level since 2017, both in terms of the number of transactions and their combined size, Artemis found. Four mortgage ILS transactions came to market during the year, Artemis said, representing nearly $1.20 billion in risk capital, a steep decline from the record $6.3 billion of mortgage ILS issuance across 14 transactions in 2021, the report said.

As 2022 closed, the outstanding catastrophe bond market size reached a new year-end high of $37.9 billion, Artemis said, a $2 billion increase from the end of 2021.

"All in all, 73 new catastrophe bond and related ILS transactions were issued throughout 2022, which is down on the record of 84 seen last year, but still impressive and a sign of continued investor and sponsor appetite," the Artemis report said. "Of these, the majority, or 51 came to market in the first half of the year, with just 22 transactions issued from July to the end of December."