Cat bond market has record potential in 2023: Dubinsky, Gallagher Securities

Catastrophe bond issuance volume is expected to come out higher in 2023, than it did last year, with market conditions likely to stimulate demand on both sides of the trade, according to Bill Dubinsky, CEO of Gallagher Securities.

Speaking with Artemis Dubinsky explained that, with pent up demand for protection among insurance and reinsurance firms, while investors continue to appreciate the benefits of insurance-linked securities (ILS) as a diversifying investment opportunity, the potential is there for a record year.

“We anticipate that non-life cat bond issuance will increase year-on-year,” Dubinsky said.

“Sponsors have pent up demand for increased reinsurance coverage and cat bond capacity can potentially contribute to this unmet need.

“It is quite likely that non-life cat bond issuance will exceed 2022 levels – and may even exceed 2021 if the money comes in fast enough.”

This is a very positive outlook from Dubinsky, which bodes well for the cat bond community.

2021 saw the record set for a single year of issuance in catastrophe bonds, with $12.5 billion of property cat bonds, plus $470 million of cat bonds covering other lines of business and another $1 billion of private cat bonds, according to Artemis’ data.

The investor flows will need to be tightly controlled in 2023, to match them with what seems to be a burgeoning issuance pipeline.

But if everything comes together, based on the comments from Dubinsky and our recent coverage of other market participant statements, the cat bond market could see a particularly busy year, it seems.

Dubinsky said that capital inflows are the critical factor for 2023.

“The degree to which cat bonds and other non-life ILS products grow in 2023 is heavily dependent on the level of net inflows. While we are starting to see some signs of successful fundraising and a resumption of net inflows, it remains too early to state with certainty if this new capital will arrive in force in Q2 2023, H2 2023, or next year.

“We need large net inflows before the market can come close to meeting the untapped potential for ILS capacity from sponsors,” he explained.

Dubinsky feels that the dollar exchange rate is a factor that has been overlooked and could play a significant role in ILS market capital development over the next year.

He told Artemis that, “While the impact of broader financial market downturns on new allocations from existing investors with allocation percentage strategies did have some impact in 2022, an under-the-radar issue is the impact that FX had on non-life ILS in 2022.

“We measure net AUM as well as cat bonds issued and outstanding in US dollars. Yet the underlying money comes from across the globe, much of it raised in other currencies. The strengthening US dollar masked some otherwise solid progress that a portion of managers made in raising money in 2022.”

Further explaining, “If the dollar continues to stabilize or even weakens in 2023, we will have a tail wind instead of a head wind on sector AUM growth. In addition, if the broader financial market performs better in 2023, those end investors partially constrained by percentage allocation rules will also have the freedom to increase their ILS allocations.”

Discussing where growth could come from for the ILS market in 2023, Dubinsky believes the main catastrophe perils will be the focus.

“Much of the 2023 non-life growth will come in peak perils. ILS can address the largest unmet capacity need in this area,” he explained.

“At the margin this could crowd out some of the promising new products and perils that would have come to market in 2023 but for the double whammy of inflation and Hurricane Ian on peak nat cat.

“As such, 2023 may be more the year of smaller proof of concept transactions in new areas laying the groundwork for 2024 and beyond.”

Read all of our interviews with ILS market and reinsurance sector professionals here.