Cat bond market has found a healthy balance for investors and issuers: Acrisure Re

The maturity and importance of the catastrophe bond product has seen the asset class become more than just another option and develop into a strategic, tactical play for both investors and issuers, according to experts at Acrisure Re.

As the cat bond market continues to evolve, Artemis spoke with Patrick Witteveen and Sandro Kriesch, Managing Directors of Catastrophe Bond Solutions at reinsurance broker Acrisure Re’s Corporate Advisory and Solutions (ARCAS) division, about market trends and investor and sponsor sentiment.

Cat bond issuance broke records in both 2023 and in the first quarter of 2024, and Artemis’ data shows that it’s going to be a very active second quarter.

“The momentum is there,” said Witteveen. “If you look at it from an investor and client perspective, there are so many opportunities right now. You’ve got your existing clients issuing cat bonds and you’ve got new entrants, and you see the same on the investor side. So, it’s really a supply and demand situation.”

The strong issuance trend, which is expected to persist throughout 2024, is being driven by various factors on each side of the fence, and Witteveen stressed the importance of really zooming in and exploring why now is such a good time to be in the cat bond space.

“You need to look at the optionality of what the product offers both sides,” he said.

“If you look at insurers and reinsurers, they want to be in both markets from an optionality point of view, from a pricing perspective. It’s a great way to mitigate and diversify your risk. And certainly not just in the short-term, but medium to long-term as well, to hedge your risk and to come up with a strategy whereby you work in the traditional market and in the third-party capital market side by side. And I think that if this is done in the right way it can be extremely efficient,” he explained.

Of course, with spreads coming off a bit from the highs of 2023 there’s naturally greater interest from issuers, but cat bond spreads are still healthy and attractive for investors too.

“The way I look at it from an investor perspective, is do I really mind if I get a 6% or 7% return? What I’m focused on as an investor is the risk level.

“You don’t want to get too many questions about smaller positions, and you don’t want too much volatility in your portfolio because of a relatively small allocation. Many investors on the traditional side don’t know that much about insurance and reinsurance. A cat bond allows you to dip your toes in the water. It’s an efficient way to gain access to this type of risk,” said Witteveen.

Currently, most of the cat bond market is 144A, and while private ILS remains an attractive area with its own benefits, it’s not as liquid as a 144A issuance, which is more supportive of investors’ liquidity needs and budgets.

“And let’s not forget that the original case still stands, it’s a largely uncorrelated diversifying investment, and with the added value of more liquidity, it’s a useful tool that comes close to how they work on a daily basis on the traditional investor side. So, it makes a lot of sense,” said Witteveen.

Expanding on the optionality point, Kriesch questioned why in 2023 there was so much paper being printed given the prices were so high.

“You really must ask yourself, why have there been new sponsors in the 2023 market? Why did they not shy away and say we’ll come next year or the year after because pricing is too high?

“I recall numerous clients who printed a total of $1.8 billion and only targeted $1.2 billion, that’s a significant 50% more. Why did they do this? Why did they pay so much? That’s also part of the question around the optionality. Those issues must have been prepared many months before. Clearly, it was a strategic move. The high spreads did not push them away. So, it’s not just “let’s jump in and do it”, they have been planning this for a while,” said Kriesch.

“They must see capital-diversification as a motivator. It’s not just an optionality, it is a strategic play of being with both feet in all the markets you can be in. And now it’s more accessible for them, too. Cat bonds seemed to be, in the past, just for the large players, but not anymore. That’s also where we want to be a bit more active.

“Ultimately, you need to be in those markets and not just tactically. It’s about price finding, it’s about conditions, you have to learn what’s happening left and right of you. It’s not the traditional market where you are bound for decades, you need to have options and you strategically need to be in there, more today than in the past” he added.

The conversation then turned to pricing and the fall in spreads from the records witnessed last year.

Interestingly, Kriesch asserted that the levels of spreads in the cat bond market a year or so ago were actually painful.

“They were near the capital costs of sponsors. So, I think anything higher at that time and then maybe the cat bond issuance would have been stalling, because it just wouldn’t have made any sense to do it because you might as well retain the risk and not seek capital to cover it.

“Since 2023, spreads have come down, absolutely, but not in an alarming way. If you look at the numbers, they have come down to sustainable levels for both sponsors and investors,” he said.

“On the investor side when you work with pension funds, asset managers, or large family offices for example, a return of 6, 7% without too many surprises, relatively little volatility, will be perceived as a stable investment,” added Witteveen.

To conclude, both Witteveen and Kriesch noted that investor and issuer sentiment is very positive for the cat bond product at this time, driven in part by a better understanding between both worlds.

“Clearly, it’s not just about pricing and risk levels are equally important. It goes back to the question where it sits in your portfolio? What do you expect of it? And where we are right now, I think we’ve found quite a good, healthy balance for investors and for re/insurers,” said Witteveen.

Read all of our interviews with ILS market and reinsurance sector professionals here.