Gap between traditional and capital market rates narrowed for some perils: Swiss Re

In 2023, the catastrophe bond market became increasingly attractive for sponsors, with the gap between traditional reinsurance and capital market rates narrowing for some perils, according to reinsurance firm Swiss Re’s Capital Markets division.

This helped to heighten the attraction to cat bonds as a complementary or alternative form of reinsurance cover last year, resulting in a year where record issuance was accompanied by a glut of new sponsors to the catastrophe bond market.

Commenting on a year that saw significant cat bond market growth, Swiss Re Capital Markets explained, “Overall, the total notional outstanding at the end of the year was 20% higher year-on-year and significantly higher than any previous year at nearly USD 43.1bn. The 2023 issuance was broad, with new sponsors and new perils introduced. This record issuance was driven by a large inflow of capital into the market, as maturing capacity and coupon returns would not have been sufficient. Not surprisingly, in addition to increased investor interest, there were many new and returning sponsors seeking coverage.”

On new and returning cat bond sponsors the company said, “The year saw a number of new sponsors enter the market, as well as a number of sponsors returning after a period away from the ILS market. In 2023, there were 13 unique new sponsors, and six additional sponsors returning to the market after an absence of five or more years.”

All of which was testament to the attractive execution being secured for sponsors, that alongside ample capacity meant a more stable pricing environment.

“This further emphasizes the continued relevance and attractiveness of the cat bond market within the broader reinsurance space,” Swiss Re Capital Markets explained.

Adding that, “The gap between traditional and capital market rates narrowed for some perils.

“Additionally, as inflation increased the cost of claims year-on-year, carriers managed their programs by holding more risk on their balance sheets as well as ceding more risk overall.

“As a result, the cat bond market became a more attractive option for securing an alternative source of capacity at competitive rates.”

Another notable feature of the cat bond market in 2023, was increased issuance of deals exposed to risks in Europe, Swiss Re highlighted.

“The shift is particularly evident when looking at the total market outstanding, rather than just new issuance, as cat bonds tend to provide multi-year coverage. There has been a significant increase in the coverage of European perils in 2023 and a noticeable decrease in coverage of Japanese perils, particularly earthquake,” they explained.

While 2023 saw a strong year of catastrophe bond market growth, helped by investor interest and new capital inflows to the sector, Swiss Re also highlights that this did not “result in a drastic decline in spreads like in 2021.”

As a result, in the second-half of 2023, “issuance spreads decreased slightly, but remained elevated relative to
recent years.”

Summarising last year in the catastrophe bond market, Swiss Re Capital Markets said, “In 2023, investors experienced a stark contrast in returns after a challenging 2022. The market ended the previous year with a high level of volatility and uncertainty around the potential loss from Hurricane Ian. Mark-to-market valuations recovered, and principal losses remained limited to a handful of structures. As a result, the Swiss Re Global Cat Bond Total Return Index posted a calendar year return of 19.69% for YE 2023. This is the highest one-year return for the index since 2002.”