Cat bond sector may see second half surge, says AM Best

Catastrophe bond issuance in the first half of 2023 exceeded the whole total for all of 2022, a report from AM Best has revealed.

The ratings agency said pent up demand from cedents who were unable to purchase conventional reinsurance due to the hard market, may lead to more take-up of cat bonds by the end of the year.

The Best’s Market Segment Report, “Cat Bonds Lift a Muted ILS Market”, said catastrophe bond issuance in the first half of 2023 reached a record of approximately $9.7 billion, which already surpasses the total for 2022.

“The size of the cat bond market has grown consistently for the last five years and remains one of the bright spots in the insurance linked securities market,” AM Best said. “This has helped to lift overall ILS market capacity by approximately $3 billion since the beginning of the year to approximately $99 billion, as estimated by AM Best in conjunction with Guy Carpenter.

“At the same time, net capacity provided by the ILS market is lower than $99 billion due to an unknown amount of trapped capital, and despite the prospect of higher returns, capital formation remains tepid due to a number of factors.”

But Wai Tang, senior director, insurance-linked securities, AM Best, said the hard market means some cedents who were unable to secure reinsurance in the first half of the year may have room in their budget to use cat bonds in the second half.

“The dearth of capital injections into the reinsurance market and the resulting supply shortfall has meant that many insurers were unable to fill their requested covers from reinsurers except at exorbitant prices during the year,” he said.

“At year end, the cat bond and collateralised reinsurance markets may be met with pent-up demand for reinsurance cover among cedents that didn’t have room in their budgets to purchase as much reinsurance coverage as they would have liked at the January or July 2023 renewal periods.”

AM Best said it expects the ILS market to remain hard if heightened cedant demand for capacity is met with overall reinsurance capital levels that are relatively flat.

“Whether higher returns posted by the ILS asset class begin to attract additional capital remains an open question,” said Emmanuel Modu, managing director, insurance-linked securities, AM Best. “Industry observers have noted that ILS investors are likely focused on other, more familiar asset classes that offer higher expected returns with greater liquidity and perhaps less volatility.”