ILS market maintains steady growth

Bermuda remains the leading centre for third party capital as the ILS sector continues to grow and the cat bond market sets new records.

Bermuda remains one of the leading domiciles for insurance-linked securities (ILS) and the  Bermuda Stock Exchange (BSX) is the leading exchange for ILS listings.

The Island’s pre-eminent position seems likely to endure as the ILS sector continues to grow and the catastrophe bond market sets new records.

While catastrophe bonds are the largest and best-known segment of the market, innovative approaches to use ILS vehicles for casualty and cyber risks are growing. Collateralised reinsurance vehicles and segregated cell companies continue to expand, despite controversies.

AM Best said in an August 2024 Market Segment report, “ILS Capacity Grows, as Cat Bonds Issuance Breaks Record“, that the ILS segment continues to grow at a modest pace, “mostly aligning with market demand as opposed to exceeding it”.

The growth was underpinned by the catastrophe bond market, which was estimated at $45 billion at mid-year 2024, representing growth of $3 billion. A report from Swiss Re put its size at $46.5 billion. 

AM Best said it and broker Guy Carpenter estimated the overall capacity of the ILS market at approximately $100 billion. 

ILS capacity increased by mid-year because capacity from maturing deals was recycled into 2024 transactions, some capital created out of the record-breaking 2023 earnings was deployed, and a modest amount of new capacity entered the space, AM Best said. 

Catastrophe bonds had a stellar year in 2023, with the segment outperforming most other forms of investment as the industry benefited from a benign claims year with limited large natural disasters.

Bloomberg News reported that catastrophe bonds gave investors 20 percent returns in 2023. As of June 30 this year, investors in cat bonds enjoyed an average yield of about 15 percent, comprising a risk premium of 10 percent and a money market rate of about 5 percent, Bloomberg said.

Nonetheless, AM Best said the market would need more years of solid returns to see a major influx of new investment. 

“One year of great returns is probably not enough to draw in material amounts of new capacity that would significantly soften the market,” said Emmanuel Modu, managing director, ILS, AM Best.

However, Artex, whose Artex Capital Solutions is based in Bermuda, said it had seen an increase in investor interest after 2023’s strong performance.

“As investors recalibrate their strategies, they are drawn to opportunities that offer exposure to high value perils, recognising the potential for attractive risk-adjusted returns in these specialised segments of the market,” a company report said in June.

ILS investors are becoming more sophisticated and nimble than in the past, AM Best said.

“In some cases, opportunistic investors who dipped into the ILS market in 2023 because of the record return potential have exited the market in 2024 based on the premise that the 2023 returns will not be repeated this year.

“ILS managers have built efficient platforms to facilitate this type of more nimble cat risk trading by investors. Whereas in past years institutional ILS investors may have followed an approach to ILS investing more akin to ‘set and forget’, quick-moving cat risk trading may become more prevalent in the ILS market.”

According to joint research by Guy Carpenter and AM Best, dedicated reinsurance capital will reach about $625 billion this year, of which third party capital will make up around $110 billion.

Figure 1 shows how third party capital’s growth has kept pace with traditional reinsurance.

Different avenues

Catastrophe bonds are among the single largest components of the ILS market, but other segments are also growing and being developed in Bermuda.

AM Best said: “Sidecar capacity is estimated to be between $6 and $8 billion and may well have shifted to the higher end of that range, as capacity providers find those deals more attractive given underlying improvements in rate adequacy.”

The industry-loss warranty (ILW) market has also seen more activity this year, the report said.

AM Best said: “ILW capacity is estimated to be between $5 and $7 billion.

“ILW capacity going into the mid-year renewals may have been slightly higher than in other recent renewal periods and that capacity was quickly used to hedge against an Atlantic hurricane season that is forecast to be very active.”

Collateralised reinsurance, which includes retrocession, has also been growing, albeit more slowly than cat bonds.

“Collateralised reinsurance capacity is estimated at approximately $46 to $50 billion. Capacity growth in this segment had lagged that of cat bonds. However, as fundraising begins to rebound from the sluggish pace of the past two years, capacity growth could speed up.”

The growth of the segment has been a boon for the BSX, which listed 195 new ILS in 2023, bringing the total to 849 ILS, representing a 91 percent share of global ILS listings and a 10 percent increase on 2022 (Figure 2).

According to the BSX’s year-end report, the overall nominal value of ILS-listed securities was $59 billion, up from $52 billion in 2022. 

The value of catastrophe bonds listed on the BSC was $40.8 billion, representing 91 percent of global issuance.

While the ILS market continues to grow in size and sophistication, it remains vulnerable to threats, none more so than the prospect of an above average hurricane season. To date, cat bonds, designed to deal with the most extreme catastrophes, have not been called on.

By October, when trade organisation ILS Bermuda holds its annual Convergence conference, the sector will have a better idea of whether its investors have been forced to make payouts, or if they will remain the darlings of the investment world.

Recognition that third party capital and ILS vehicles complement traditional reinsurance continues to grow.

Reinsurance giant Everest said in July it was expanding the scope of its alternative capital business Mt Logan to offer third party investors a wider range of investing opportunities in addition to its ILS vehicle Mt Logan Re. 

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