Cat bond pipeline “potentially record breaking”, says Gallagher Securities

The pipeline for new catastrophe bond issuances looks like it is “potentially record breaking” as we move into the first-half of 2023, according to insight from Gallagher Securities.

Writing in the latest renewals report from reinsurance broker Gallagher Re, the capital markets and ILS team at Gallagher Securities signal a possible record period of catastrophe bond new issuance ahead.

However, while the cat bond market pipeline is looking particularly strong, the availability of capital to absorb these new issuances will be critical in its full potential being realised.

Overall, the Gallagher Securities team say that catastrophe bonds remain in favour with investors, with ILS market capacity continuing to “gravitate away from collateralised reinsurance towards cat bonds.”

Cat bonds have performed better for investors over the last five years and offer more liquidity, so investors in the cat bond asset class have avoided many of the challenges that investors in private ILS and collateralised reinsurance or retrocession may have faced.

But demand from ceding companies and possible sponsors is high at this time and with many having been unable to tap the cat bond market through the second-half of 2022, it’s possible there is now pent-up demand for cat bond backed reinsurance protection.

Around the second-quarter of 2022 many market observers and broker-dealers were calling for a record pipeline of cat bond sponsors to have been building up.

But given challenging capital market conditions resulting in less ILS capital being available than anticipated, then hurricane Ian coming along in September, the cat bond market was unable to service all potential sponsors through the final months of 2022.

Leading us into a position where, with a challenging reinsurance renewal season where capacity was also less readily available, there is now pent-up demand to sponsor cat bonds, we at Artemis are told.

Gallagher Securities commentary reflects this, as they state, “The cat bond pipeline is quite strong and potentially record-breaking moving into H1 2023.”

They caution though that “capacity constraints may make it difficult for some of the deals to succeed.”

This harkens back to the situation we discussed in an article last year, where we explained the importance of matching the cat bond market pipeline to investor flows and available capital.

That remains critical as we move into the first-half of 2023.

Gallagher Securities believes things will get easier though, saying that, “Moving further into 2023, conditions should improve as investors are raising new capital to deploy.”

But, the broker-dealer cautions that, “The speed with which this new money comes in is highly uncertain.”

Read our brand new catastrophe bond market report here.