ILS sector on course for record issuance in 2023 after bumper H1

The first half saw record-breaking new ILS issuance, as sponsors found cat bonds a great alternative to hardening traditional reinsurance and investors successfully raised new capital, with market participants confident the momentum can be maintained for the rest of the year and beyond.

A Swiss Re report released in August said ILS issuance reached $9.85bn in the first six months of the year, a record for a first half and already enough to make it the fourth biggest full year of issuance by itself.

The first quarter had been in line with historical levels before issuance in the second quarter “skyrocketed”, the reinsurer said.

The market is on course to set a new record for issuance for the whole year.

Talking to this publication, Jean-Louis Monnier, ILS head in Swiss Re’s Alternative Capital Partners unit, said that issuance was very active until the end of July.

“We currently stand in excess of $10bn of issuance for 2023, which is the highest amount historically for the first seven months. And I think we are on track to have a record year, despite the fact that January and February were very slow,” he said.

Paul Schultz, CEO of Aon Securities, is optimistic that the ILS industry can reach $14bn-$15bn in issuance this year. He also believes this momentum is going to carry over into 2024. “We're expecting a healthy or elevated amount of issuance next year as well,” he told this publication.

The executive reported that a lot of conversations are taking place that will lead to issuance in the near term.

“But there are also a lot of newer conversations going on,” he said. “The lead time around issuing outside of the traditional insurance and reinsurance space has always been longer, but what we're having are more conversations in that space. So we're actually quite bullish around increased participation from public sector and corporate markets.”

Swiss Re’s Monnier said that he “wouldn't be surprised” to see increased participation from nationwide US insurers sponsoring cat bonds in 2024.

“In the US, we’re quite optimistic that maybe some nationwide insurers that have managed prudent growth in the face of relatively scarce reinsurance and ILS capacity in 2023 will probably seize opportunities to grow in the underlying markets,” he said.

“There’s also been a readjustment in premiums in the underlying insurance markets. So we would expect large nationwide issuers to be heavier users of ILS in 2024,” he added.

What a difference a year makes!

The buoyant ILS market currently is a contrast from the situation almost a year ago.

Swiss Re’s Monnier said that the key drivers of 2022 were the impact inflation had on demand for capacity, with rebuilding costs readjusted and insurance companies increasing insured values. This increased their demand for nat cat protection.

This was compounded by Hurricane Ian creating a lot of uncertainty ahead of the 1.1.2023 renewal.

Market capacity was constrained in the fourth quarter of last year amid fears of a market-resetting event in Ian.

“[Ian] created or led to a spike in rates, and a spike in cat bond spreads that was actually even higher. So there was a bit of a capacity squeeze in the ILS market, and so it created a real sharp increase in spreads at the time,” Monnier said.

This uncertainty meant issuance remained limited in Q4 and into the first two months of this year.

“But then these higher rates attracted capital,” said Monnier. “So we have seen the ILS investors being very successful at raising new capital in the first half of the year, mainly in Q2 actually. This then allowed the very sharp increase in issuances over that period.”

Since February, there has been a tightening of spreads in the cat bond market.

In its report, Swiss Re said that, in tandem with the primary market, it has seen spreads tightening, notably in the secondary market, due to new inflows coupled with a high level of maturities. The reinsurer expects this pattern to continue for the short term and, barring any events, eventually see a period of stabilisation likely by the end of 2023.

Aon’s Schultz said that, at the start of this year, he had envisioned capital flowing into the sector because of the increase in rates.

“We saw an active Q1 but really an elevated Q2, driven in part by fresh capital coming into the space, but also interest from insurers primarily looking to diversify that reinsurance program given some of the challenges at the 1.1 renewal period,” he said.

The positive impact of Ian on the ILS sector

Ian was initially feared to be a principal event for the ILS sector but actually turned out to be a mark-to-market event, Schultz said.

The Aon executive suggested that the sector has seen investors as a result of Ian taking a fresh look at the way that they allocate capital to the space. The ILS market’s unscathed emergence from the storm highlighted that cat bonds tend to sit towards the higher end of programs, have a single limit, and are not reinstatable.

“As a result, we've seen more capital coming into the bond products on a relative basis compared to other collateralised products, like collateralised re and collateralised retro,” Schultz said.

Monnier suggested that Ian probably had a positive impact on capital raising.

“It did catch the attention of a number of end investors that saw value in the cat bond spreads,” he said. “Even though the market has now settled at premium levels that are lower than what they were in Q4, we're still in an environment where, in line with traditional reinsurance, the remuneration for risk is much better than it was two years ago.”

He added: “I would consider that what happened in Q4 a bit of a blip, where the ILS market spreads were actually higher than what it turned out to be in traditional. But both markets have now converged and stabilised at levels which seemed to be pretty stable, and at which we were actually very confident that it should continue to attract both investors and sponsors.”