The catastrophe bond market has “never been busier” and we should expect to see significant issuance over the coming months, while the rest of the insurance-linked securities (ILS) market faces a more challenging period around the renewals, according to industry executives.
Speaking today in London at the ILS Bermuda Beyond Convergence event, representatives of structuring brokers and reinsurance capital markets teams agreed that the catastrophe bond market stands to be extremely active over the next few months.
While the cat bond market has faced its losses over the last few years, some of which have yet to be realised while numerous outstanding cat bonds remain marked-down in terms of value and considered at-risk of loss, the asset has performed largely as expected and presented investors in ILS with less uncertainty than collateralised reinsurance alternatives.
As a result, the cat bond market has been the first area of the ILS market to bounce-back, with some managers of cat bond funds successfully raising new capital in anticipation of a strong forward pipeline and regular deal flow ahead.
Speaking at the event, representatives from the ILS and cat bond structuring and origination teams at reinsurance firm Swiss Re and reinsurance broker Guy Carpenter were particularly bullish on the prospects for the catastrophe bond market in the run up to year-end and beyond.
Andy Palmer, Head of ILS Structuring, EMEA & APAC, at Swiss Re Capital Markets, explained, “In the cat bond market, it’s an incredibly busy time with at least four deals in the market at the moment and many more to come in Q1 and Q2, thinking ahead of the U.S. renewals season next year as well.”
Des Potter, Managing Director at GC Securities, concurred saying, “I totally agree on the cat bond product, we’ve never been busier.
“It’s been a very active Q4 and it will be an extremely active Q1 with new issuance.”
Palmer continued to explain that while the outlook is looking particularly good for those investors and ILS fund managers seeking catastrophe bond investments, it’s still a more challenging environment than it used to be.
“Issuance has been a bit lighter, but it’s a more difficult market than it was twenty-four months ago, just due to the general capital availability and the disappointing performance as a result of all the events,” Palmer said.
While the pipeline looks strong, the issues affecting the rest of the market are also a factor for cat bonds, Palmer suggested, saying that it’s a similar story as across the other sides of the ILS and collateralised reinsurance market, such as private deals, quota-shares and sidecars, in terms of capital availability.
“I don’t think the stories any different,” Palmer continued, adding “There’s a willingness to do a lot of business, but it comes down to the capital availability question and it’s a question of price in many cases.”
Which makes it sound like the cat bond market could actually be a lot more active than it is and that perhaps timing is being carefully watched, to ensure the ILS investor market is not swamped with new deals at the same time and to allow fund managers to better manage allocations and match them to their ability to raise new funds.
Potter from GC Securities highlighted the particular difficulties facing the collateralised reinsurance side of the market, compared to the high levels of activity in cat bonds.
“Contrast that with what’s going on in the collateralised reinsurance space and the sidecar space, where I think we’re facing one of the most challenging renewal environments at January 1 since ILS capital came into the market,” he explained.
Continuing, “We are seeing the investor community go through a bit of a pause, a shift of money being reallocated around the sector.
“But investors aren’t rushing to make those decisions before January 1.”
Potter said that investors are pausing to reflect on the last few years and performing diligence on managers, to ensure they are allocated to the right strategies through the most appropriate vehicles, saying that investors are looking to make the “right decision” rather than the “quick decision.”
Palmer also said, “We see many investors being a bit more choosy, backing certain players and not backing certain players.
“I think there’s a willingness from everyone here to try and do the transactions, but at the end of the day there’s only so much capital available at the moment.”
Potter said the market will shrink as a result of this investor pause that he’s seeing.
“We are looking at a capital squeeze coming up at January 1, particularly in the collateralised reinsurance and quota-share sidecar space,” he said.
While more positively Potter continued, “But in the cat bond space, where we are seeing new inflows of capital coming, it’s a vibrant market and it needs to be as we’ve probably got about $10bn of cat bonds maturing next year.”
It sounds like there is a significant opportunity in the cat bond market now and into the coming months, both for investors and also for ceding companies looking for protection.
As new cat bond transactions have executed lately, they have reflected investors demands for a higher yield, but also efficient execution on a relative basis for the cedants as well.
It suggests the catastrophe bond market is operating efficiently, despite the crunch of capacity in ILS more broadly.
It’s going to be an interesting period ahead, as the pipeline builds and allows investment managers to raise new capital inflows as well. A bumper period of cat bond issuance seems to be ahead, with sentiment very positive among all sides of the market.
You can find details on almost every catastrophe bond ever issued in the Artemis Deal Directory.