Credit Suisse tells investors to buy cat bonds in post-Ian shake-down

Cat bonds could present strong buying opportunities as Hurricane Ian tops off a long list of factors pushing the market towards higher returns and better structures,  Credit Suisse is telling investors.

“The cat bond market is entering a particularly exciting market momentum,” Credit Suisse said in note to the market, citing a tight reinsurance market, rising spreads, improved collateral yield and the shake-down from yet another season of reinsurance losses.

Hurricane Ian is not just one of the most expensive storms in history, it’s the potential breaking point for the underlying insurance and reinsurance markets.

“Hurricane Ian, which will go down in history as one of the costliest storms, left a significant mark on performance,” analysts wrote, citing the single largest downward move on cat bond indexes since market inception.

That impact stacks on top of inflation in insured values, a dry-up in retrocession, runaway increases in underlying property insurance rates in cat-exposed regions and fatigue from investors trapped in the market by prior events.

“The entire industry is on the verge of an upheaval, which can offer interesting market opportunities for cat bond investors,” analysts wrote.

Cat bond yields have risen apace since nat cat losses started to overrun the industry from 2017. “In the wake of Hurricane Ian, we expect this trend to become much more pronounced.”

Credit Suisse expects as much as a 110 to 140% increase in yield spread in FY2022, including the 60% already in as of Q2. Credit Suisse then expects another 50 to 80% increase in yield spread for 2023.

“The extent of the final premium increase will depend primarily on the ultimate losses caused by Hurricane Ian and the level of demand or inflow of new capital into the cat bond market,” analysts wrote.

Return on collateral will additionally rise to above 4% to further pad returns and offer a variable-rate flavour, they noted.

The cat bond market has also responded to the dearth of capital with an improvement on structures, Credit Suisse noted, citing higher deductibles, stricter contract terms, or the exclusion of specific risk classes.

Such steps “further increases the risk-adjusted attractiveness” of cat bonds, analysts wrote.

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