Catastrophe bond market momentum expected to persist: Kumar, GC Securities
The momentum seen in the catastrophe bond market over the last year is expected to persist, with further growth in the amount of cat bonds outstanding expected by year-end 2024, Shiv Kumar, President of GC Securities told us in an interview.
Kumar leads the capital markets and insurance-linked securities (ILS) specialist unit of reinsurance broker Guy Carpenter and during an interview with Artemis around the recent Monte Carlo Rendez-Vous event, he explained the company is bullish on cat bond activity remaining elevated.
GC Securities is one of the most prolific companies in the catastrophe bond space, on the deal arranging, structuring, bookrunning and broker-dealer sides of the market.
On the catastrophe bond market, Kumar is anticipating the continued growth of risk-capital outstanding through the rest of 2024.
“We see a “risk on” sentiment in the market at this time. Investors have easily absorbed record issuance in 2023 as well as record issuance so far in 2024. We are estimating total alternative capital to grow to be between $105-110 billion and total outstanding 144A catastrophe bond limit to reach around $50 billion by year-end,” he told us.
Adding that, “Both the breadth and depth of the market are increasing. In terms of breadth, almost 50 new sponsors have accessed the cat bond market since 2020 and almost half of them have returned with subsequent issuance. In terms of depth, we have seen multiple transactions this year at or above $1 billion issuance size.
“Over $5 billion of outstanding bonds are scheduled to mature between now and January and as that cash is recycled we expect the momentum of the market to continue barring unfavourable storm activity.”
There have been changes to the appetite of investors which became evident in cat bond issues over the last couple of years, but at its core the cat bond product remains functional and investors show no sign of their appetites reducing.
Kumar explained that the focus remains on more risk-remote layers of reinsurance, although structural features can get investors comfortable lower-down as well.
“The cat bond product has been typically focused on mid to top layers of the reinsurance tower. Part of the reason is the absence of a reinstatement feature and the other part is investors’ need for liquidity which is more limited for riskier bonds, especially for indemnity triggers,” he told us.
“Of the total issuance in 2024 so far, approximately 12.5% of cat bonds have had annual expected loss higher than 4%. If we look at all outstanding bonds instead of only 2024 issuance, then that share is approximately 13.1%,” Kumar continued.
Going on to say that, “While recent issuance is slightly more risk remote, it is not fundamentally very different in risk profile.
“Investors seems to be more comfortable taking higher attachment probability in industry-index trigger structures as their concerns about collateral trapping are mitigated. ”
Read all of our interviews with ILS market and reinsurance sector professionals here.
