Strong alternative capital supply growth expected in 2025 for cat bonds and ILS: Fitch

Unless there are “substantial” losses to insurance-linked securities (ILS) from catastrophe events in the second-half of 2024, Fitch Ratings said it expects “continued strong supply growth in the alternative reinsurance capital market into 2025.”

Fitch Ratings said that returns in catastrophe bonds and other insurance-linked securities (ILS) remain attractive, which has helped to elevate and sustain investor demand.

This demand had largely been seen for catastrophe bonds, but now increasingly we at Artemis are speaking with investors looking for opportunities in the private ILS and collateralised reinsurance marketplace, which is a promising signal.

Fitch Ratings said that, “Capital levels of insurance-linked securities (ILS) continue to reach record levels.”

The rating agency notes an expanding appetite from investors as well, saying that at the mid-year retrocession renewals, “The recent rate temperance reflects a robust return of retro capital supply from both ILS market capacity, principally catastrophe bonds, and traditional reinsurers as returns have increased considerably.”

The rating agency further said, “ILS investor willingness to provide capital support remained very strong in 1H24. Increased alternative reinsurance capacity reflected the exceptionally favorable rate environment for property catastrophe risks in 2024, following the significant price correction in the prior year and corresponding attractive expected returns available in the market.”

Investors continue to be particularly attracted to catastrophe bonds, partly due to the “attractive yields on recently issued transactions and the generally higher positioning of the catastrophe bonds in cedent catastrophe reinsurance towers,” Fitch explained.

In addition, the fact we haven’t seen much loss activity in catastrophe bonds of-late, is reflective of the higher layers of reinsurance they now tend to cover.

Fitch said, “Limited recent loss activity for catastrophe bonds with per occurrence triggers reflect the generally remote attachment points used in the market,” but added that, “However, ILS capacity supporting aggregate reinsurance have come under pressure from heightened severe storm activity in the US.”

There remains ample capacity in the market for these higher layers of property catastrophe reinsurance coverage, but Fitch does expect the ILS market to continue growing, which suggests a gradual spill-over back into certain mid to lower layer products, we believe.

While appetite remains suppressed, or depressed, for these layers, there are increasing signs that appetite may return, at least on a one-shot basis.

At the mid-year renewals, there was a greater level of deployment of collateralized capacity to lower layers of reinsurance towers, as certain ILS managers looked to capitalise on the continued hard pricing at these levels.

Looking ahead, Fitch expects both cedent and investor demand will continue, resulting in a chance of further ILS and catastrophe bond market growth.

“Fitch expects continued strong supply growth in the alternative reinsurance capital market into 2025, barring substantial ILS catastrophe losses in 2H24,” the rating agency stated.