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Catastrophe bond pricing to remain high in 2023

'Investors are demanding more return for their capital because they're seeing more attractive opportunities in the rest of the investing universe," says Matthew Twilley, head of ceded reinsurance at Ariel Re

While the string of heavy loss years has had an impact on the cost of catastrophe bonds, the wider investment environment is also increasing the cost of capital

The cost of catastrophe bonds and other insurance linked securities (ILS) are likely to remain high as the supply-demand imbalance continues.

Matthew Twilley, head of ceded reinsurance at Ariel Re, said catastrophe bond prices were beginning to normalise, but were still elevated compared to where they were.

While the string of heavy loss years has had an impact on the cost of catastrophe bonds, Twilley noted that the wider investment environment was also putting pressure on the cost of capital.

“We're seeing really big movements in the capital market and that's just because investors are demanding more return for their capital because they're seeing more attractive opportunities in the rest of the investing universe,” he told Insurance Day.

“They're saying: if we want money allocated to ILS – and there's no problem with that ­– then it's got to compete with a playing field that's paying more, which is fine, but we have to pass those costs on to our clients.”

Twilley added that the impact of Hurricane Ian was not in itself a big cause of price hardening in the ILS market, but that multiple non-mean loss years were causing “loss fatigue” among investors.

“What [last year’s losses] did, was it compounded years and years of losses. So when ILS markets go to their investors and say: ‘Unfortunately, it’s been another non-mean year and, therefore, we haven't made money’. That's a pretty tricky chat to be having.”

He continued: “It’s pretty hard to go back to your capital again and say, ‘It’s only going to get better from here’, when you used that line in 2018, 2019, 2020 and 2021.”

The supply-demand imbalance in the market was also noted by Aon, which said more insurers and reinsurers were looking to tap into alternative markets to mitigate a challenging traditional reinsurance and retrocession market.

It added that the issue was happening despite year-on-year growth in the ILS market. In its latest ILS market update, Aon said issuances outpaced maturities in the catastrophe bond market by $2.2bn, which is growth of around 7% year on year.

The supply-demand issue, alongside increased catastrophe activity over the last five years, has pushed the bond market into a higher total return environment, Aon said, with material pricing increases and higher collateral returns.

Ian was expected to cause “manageable” losses in the catastrophe bond market of £35m, Aon added, noting that mark-to-market movement of spreads across all bonds were “significantly and clearly much larger than the potential principal losses alone”.

Bill Dubinsky, chief executive of Gallagher Securities, said Hurricane Ian was just one factor that had caused a reduction in supply in ILS capacity.

“The ILS market took losses across catastrophe bonds, sidecars, and collateralised reinsurance from Hurricane Ian. However, especially with respect to cat bonds, losses seem less than originally anticipated,” he said. “Ian is only one driver that reduced supply of ILS capacity in Q4 2022. The strengthening of the dollar in 2022 had a significant impact.”

But, said Dubinsky, catastrophe bonds still tended to outperform other forms of ILS and, because of this, they generally attracted more capital. He added that the ILS market in general was now “more orderly”, whereby participants can transact bigger deals and at wider spreads than they could a year ago.

“It has started to attract more capacity in light of the increased rates, but not yet enough to cause any softening. Similar to the broader market, investors are waiting to see how the recent Florida reforms impact claims,” he said.





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