It is “not outside the realm of possibility” that cat bond issuance will hit $20bn this year”, Brett Houghton, managing director at Fermat, has said.
Speaking at the Sifma ILS conference, the executive noted that there was currently “really good equilibrium between investor demand and issuer demand”.
This reflected growth in sponsor demand owing to inflationary pressures and a very active new issuance pipeline with 16 deals currently in the market, balanced by retained earnings from 2023 on the supply side.
Chin Liu, director of ILS, fixed income solutions and responsible investment research at Amundi US, added that given the current yield environment, with the Swiss Re cat bond index at 13% for the year so far, the market was growing organically, which offered an opportunity for sponsors. This assumed that investors did not seek a return of dividend or capital.
In January, cat bond broker-dealers forecast issuance in a range from $13.5bn to $17.3bn for 2024, with the average at $15.6bn, as renewing deals and issuance from new sponsors were expected to continue driving the market.
The average estimate fell just short of 2023’s record issuance of $15.8bn, up by 79% compared to 2022. Cat bond new issuance in Q4 2023 of $4.6bn included $1.3bn from five new sponsors.
Recent history suggests that broker-dealers' year-ahead forecasts have tended to underestimate the cat bond market’s potential, as final issuance has exceeded expectations in three of the last five years.
Panel host Jean-Louis Monnier, head of ILS and CEO at Swiss Re Capital Markets, urged sponsors not to wait to initiate deals, arguing that opportunistic investors “on the higher-octane side of the marketplace”, who had participated during the hard market conditions of last year, “may go away”.
As pension funds and wealth management platforms looked to ILS for diversification, opportunistic investors like hedge funds “come in when the market is really, really strong and high, but they also withdraw when it’s probably not as good as that”, agreed Stephan Ruoff, co-head of private debt and credit alternatives and chairman of ILS at Schroders Capital.
Liu noted that in the case of longer-term investors, there was also a degree of “lifecycle management”, whereby they would expand or trim allocations according to market conditions.
However, he added that on the cat bond side of the market, there “tended to be fewer extremely opportunistic inflows or allocators”, compared to deals covering lower-layer risks, where hard market pricing gains are typically more pronounced.
But Lorenzo Volpi, deputy CEO (managing partner) at Leadenhall Capital Partners, noted that because of the recent LDI crisis in the UK, some pension fund capital had turned out to be not as sticky as previously thought.
He said the firm had also been onboarding more opportunistic investors. “If you’re able to provide good reasons for them to keep the allocation for a longer period of time, they might also change their mind and think, ‘ok, this makes sense’.”