Catastrophe bond issuance eased in the second quarter as broader economic conditions weighed on investors’ decisions, but changes in appetite among insurers for property catastrophe risks should lead to a recovery, experts said.
A tightening of retrocessional reinsurance capacity could also lead to more demand for insurance-related securities, they suggest.
New issuance of cat bonds in the second quarter fell 8.9% compared to 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 don̵7;t think the pure quarter-to-quarter comparison tells the right story,” said Philipp Kusche, New York-based global head of ILS and capital solutions for TigerRisk Partners Inc.
Issue volume for the first half of the year varies from year to year, and volume was still comparatively high in the first half of the year, Emmanuel Modu, CEO of ILS, told AM Best Co. Inc. in Oldwick, New Jersey.
“The high volume reflects continued interest in the cat bond market from sponsors and investors alike,” he said.
Mr Kusche said there was a slight decline in the amount of available capital flowing into the market but attributed it largely to macro factors.
“The Ukraine crisis created a lot of volatility in the broader markets. Investors and allocators had only limited ability to focus on insurance-related securities purely from a bandwidth perspective,” he said.
In addition, investors can evaluate all their investment options as the rapid rise in interest rates may have made other asset classes relatively more attractive, Modu said. Investors may also be somewhat “cautious” after five years of elevated catastrophe losses, he added.
Interest in the ILS sector is also being driven by changes in the traditional reinsurance sector, including rising interest rates and capacity cuts as insurers pull away from catastrophe-exposed risks.
Sponsor demand for coverage remains strong as traditional reinsurance coverage for property catastrophe risk becomes more difficult to place, Modu said.
“Traditional reinsurance capacity for property risk is more limited than in recent past years, so demand for capacity from the ILS market remains high,” he said.
Disaster-prone areas have become more difficult to place in the primary markets, which are also seeing rising prices and capacity cuts, Kusche said.
More limited retrocession capacity — reinsurance cover for reinsurers — has also sparked 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,” Modu said.
“There is strong demand from insurers and reinsurers to assess whether business makes sense in the second half of this year, and we expect that to run into early 2023. Reinsurers looking for other options in the market will be looking more closely at ILS and the capital markets, says Kusche.
“The ILS market provided sponsors with an alternative source of risk transfer capacity in a tightening reinsurance market. Some reinsurers have reduced capacity in peak zones or completely closed their natural catastrophe portfolios, which has led to increased opportunities in the ILS market,” Swiss Re said in its report.
ILS also remain popular with investors because they are considered uncorrelated to broader market returns.
The ILS market has proven resilient through the broader macroeconomic volatility caused by the war in Ukraine and rising interest rates, the report said.
“ILS showed its low correlation to the broader financial markets in the first half of 2022, supporting the diversification benefits of the asset class,” Modu said.
Mr. Kusche noted that the US hurricane season still has months to go. “The US hurricane season has a very large impact on the performance of the (ILS) sector,” he said.