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Cat bond issuance hit by broader economic woes

cat bond

Catastrophe bond issuance fell during the second quarter as wider economic conditions influenced investor decisions, but changes in appetite among insurers for property catastrophe risks should lead to a rebound, experts say.

A tightening in retrocessional reinsurance capacity could also lead to more demand for insurance-linked securities, they say.

Second-quarter new issuance of cat bonds fell 8.9% compared with the same period last year, but it was also the third-highest second quarter on record, according to a recent report from Swiss Re Ltd.

“I don’t think the pure comparison between quarters tells the right story,” said Philipp Kusche, New York-based global head of ILS and capital solutions for TigerRisk Partners Inc.

First-half issuance volume varies from year to year, and volume was still comparatively high in this year’s first half, said Emmanuel Modu, managing director, ILS, for A.M. Best Co. Inc. in Oldwick, New Jersey.

“The high volume reflects continued interest in the cat bond market from both sponsors and investors,” he said.

Mr. Kusche said there was a small slowdown in the amount of available capital flowing to the market but attributed that largely to macro factors.

“The Ukraine crisis created quite a bit of volatility in the broader markets. Investors and allocators had only limited ability to focus on insurance-linked securities purely from a bandwidth perspective,” he said.

In addition, investors may be evaluating all their investment options as the rapid increase in interest rates might have made other asset classes relatively more attractive, Mr. Modu said. Investors may also be somewhat “wary” after five years of elevated catastrophe losses, he added.

Interest in the ILS sector is also driven by changes in the traditional reinsurance sector, including rising rates and capacity cutbacks as underwriters pull away from catastrophe exposed risks.

Demand from sponsors for coverage remains strong as traditional reinsurance cover for property catastrophe risk becomes more difficult to place, Mr. Modu said.

“Traditional reinsurance capacity for property cat risk is more constrained than in recent prior years, so the demand for capacity from the ILS market remains high,” he said.

Catastrophe exposed areas have become more difficult to place in primary markets, which are also seeing rising rates and capacity pullbacks, Mr. Kusche said.

More limited retrocessional capacity – reinsurance coverage for reinsurers – has also spurred ILS interest among reinsurers, sources said.

Capacity for traditional retrocessional coverage remains tight, “so reinsurers are also motivated to try to place coverage in the ILS market,” Mr. Modu said.

“There is strong demand from insurers and reinsurers to assess if deals make sense in the second half of this year, and we would expect that to run into early 2023. Reinsurers seeking other options in the marketplace will have a close look at the ILS and capital markets,” Mr. Kusche said.

“The ILS market gave sponsors an alternative source of risk transfer capacity in a hardening reinsurance market. Some reinsurers have reduced capacity in peak zones or closed their natural catastrophe portfolios entirely, which has led to increased opportunities in the ILS market,” Swiss Re said in its report.

ILS also remain popular with investors as they are considered uncorrelated to broader market returns.

The ILS market has proved resilient through the broader macroeconomic volatility caused by the war in Ukraine and rising interest rates, the report said. 

“ILS demonstrated its low correlation to the broader financial markets in first-half 2022, supporting the diversification benefits of the asset class,” Mr. Modu said.

Mr. Kusche noted that the U.S hurricane season still has months to go. “The U.S hurricane season has a very big impact in the performance of the (ILS) sector,” he said.