Alternative capital primed for growth, cat bonds to set records in 2023: Fitch

The alternative capital market in reinsurance is primed for growth through the rest of 2023, with favourable conditions expected, according to rating agency Fitch.

The catastrophe bond market is seen as a particularly bright spot, with strong issuance conditions expected to continue through the rest of the year, leading Fitch to forecast a new record to be set for full-year 2023.

As Artemis has been reporting, with $7.1 billion of new issuance recorded in the second-quarter of 2023, taking the first-half by our measure to $10.3 billion, across 144a property cat bonds, cat bonds covering other lines, and private cat bonds, the market has been well on its way to breaking all records this year.

Now, issuance is just approaching $10.8 billion, including 144a property cat bonds, private cat bonds and all 144a cat bonds covering other lines, while property cat bonds alone surpassed $10 billion back in July.

But our readers expect the record cat bond issuance pace to continue, with the majority anticipating that 144a property catastrophe bond issuance can surpass $15 billion for full-year 2023, a new record.

But, of course, the alternative capital market in reinsurance is much broader than catastrophe bonds alone and there have been positive signs of expansion in some collateralized reinsurance and retrocession strategies and vehicles as well, not least in insurance-linked securities (ILS) funds raising more capital.

Fitch Ratings notes that, “Insurance-linked securities (ILS) funds have been raising capital in 2023 as returns in the sector have become increasingly attractive, with particularly strong catastrophe bond issuance.”

Adding that, “Fitch expects favourable conditions to lead to continued growth in the alternative reinsurance capital market for the rest of 2023, with record level of catastrophe bonds issued.”

Many of the ILS managers and reinsurer owned third-party capital units that we list in our Insurance Linked Securities Investment Managers & Funds Directory have added incremental capital through the first-half of 2023, including, in some cases, those focused on collateralized reinsurance and private ILS.

Fitch continued, “In conjunction with significantly higher traditional reinsurance market pricing, the ILS market has experienced a favourable pricing environment that has made investing in catastrophe risk more attractive following years of loss events.

“Higher spread levels relative to expected losses is driving potential return improvement and leading to rising investor interest in putting capital to work in both reinsurance- and retrocession-focused deals.”

In the catastrophe bond market, Fitch notes that inflows of capital have pressured spreads to a degree, but sees this as, “a favourable outcome for those sponsors that seek to diversify their sources of reinsurance capacity.”

Fitch also notes that the catastrophe bond market has seen deals upsizing in recent months, while pricing towards the lower end of spread guidance ranges.

Which it explains is, “highlighting investor demand for the reinsurance investments.”

“Fitch expects the heightened issuance activity in the catastrophe bond market to continue in 2H23 and set a record for 2023,” the rating agency says.