Cat bonds can cruise to fresh record in ’24; can collateralised tag on?
Catastrophe bond gross issuance could easily cruise to a fresh record in 2024 on sheer momentum, making the greater market question the degree to which ILS managers will be able to pull investors back towards alternatives in collateralised reinsurance, analysts at AM Best suggest in fresh research.
Over $10 billion in issuance is likely on replacement of maturing bonds alone if recent patterns hold. That would leave considerably less new issuance required to hit a new annual record than the market managed to produce in 2023.
Some $11 billion in cat bonds is set to mature in 2024, a big jump from the $7 billion that matured in 2023. Over the past two years, some 60% of sponsors with maturing bonds sent replacement issues to market, on average upsizing to hit an overall replacement rate of 90%, AM Best noted.
“Additional cat bond placement by brand new sponsors and sponsors who simply do not have a cat bond maturing in 2024 will push total issuance volume even higher,” analysts said without issuing further forecast.
But analysts did emphasise the strength of the trend, citing $14.9 billion in gross issuance in 2023, more than twice the sum of maturing bonds, including deals from 11 new sponsors and heavily increased sums from state-backed pools.
The question becomes if investor demand is sufficient, and investors sufficiently forgiving, to eventually divert some flows back towards collateralised reinsurance which have suffered in popularity in recent years.
“ILS managers expect that some of these investors may look to branch out into collateralised reinsurance deals in a few years if the collateralised reinsurance market can sustain healthy returns during that time,” AM Best analysts wrote.
Comments follow “poor performance” for collateralised reinsurance solutions from 2017 through 2022, often a result of trapped capital after cat events, more common to the asset sub-class than for cat bonds given their lower placement in reinsurance towers, nearer to frequency perils.
That trend has come close to putting cat bonds into first place among ILS instruments by volume. The cat bond market has now risen to $42 billion by end-2023, AM Best notes, right at the lower end of their estimate for collateralised reinsurance at $42 to 50 billion.
“Capital moved out of collateralised reinsurance and into cat bonds, continuing the trend of the past few years,” as investors AM Best analysts said of the flow trend in 2023 “showed a preference for the remote risk layers”.
Collateralised reinsurance has responded by inching its way up the risk towers as part of the sub-segment's de-risking efforts, but it still finds itself below regions being increasingly populated by cat bonds.
Collateralised reinsurance vehicles have taken other steps to close the attractiveness gap to cat bonds. AM Best notes extension spreads to compensate for trapped capital plus structural changes mimicking the traditional reinsurance market's own gains during the 2023 hard market such as higher attachment points, per event and per peril loss caps, and cleaner contract wording.
By end-2023 the total ILS market likely hit the $100 billion mark, AM Best analysts said in tandem with colleagues at global reinsurance broker Guy Carpenter, although the non-cat bond sums remain “difficult to estimate precisely”.
Beyond the $42 billion in cat bonds, sides put the collateralised reinsurance sums down to a range of $42 to $50 billion after the continuing shift towards cat bonds.
Sidecar capacity was said to be “largely unchanged” at $5 to 7 billion as “investors are taking their time before reallocating to this segment, though harder rates underlying these proportional covers may begin to spark interest”.
Industry-loss warranty (ILW) capacity is also estimated at $5 to 7 billion, down for the 1.1.2024 renewals after core retrocession providers filled a prior-year capacity gap.
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