ILS market insights: August 2023

The Insurance-Linked Securities (ILS) market ended the first half of 2023 with a record breaking 6-month stretch of new issuance. This milestone was achieved through a confluence of events including a significant capital raise from most ILS investors already participating in the market. Sponsors and investors started the year in a dislocated market.

Generally, market participants questioned if re/insurance capacity needs could be met in the alternative capital sphere, partially because the market was capacity constrained during Q4 2022 and faced what initially looked like a market resetting event after the estimated >USD 50 bn industry loss from Hurricane Ian. Investors globally saw an opportunity in the temporarily dislocated ILS market and successfully raised money to support growing demand in the new issuance pipeline. Following Hurricane Ian at the end of Q3 2022 investors faced a challenging marketplace where cat bond pricing dipped into lower stressed levels. The secondary market for cat bonds at that time consisted of investors broadly looking for liquidity and, in many cases, selling bonds at a discount. This in turn widened the spreads across all perils and resulted in a strong relative value play for catastrophe bonds and other liquid forms of ILS.

Throughout 1H 2023, loss reporting from sponsors showed less impact than the immediate post event consensus. All the while, sponsors found the cat bond market as a great alternative but an even better complement to a hardening traditional re/insurance market. The benefit of the market’s price discovery performed exceptionally during 1H 2023 and attracted new and existing sponsors to issue cat bonds. The resiliency of the market was demonstrated again in early 2023 when capital was raised at least partly from new investors who saw opportunity to enhance their portfolios with an attractive alternative. Since the end of Q1 2023, the catastrophe bond market has grown to roughly USD 40 bn. With sustained growth through the first half of the year and lower levels of maturities in Q3 and early Q4, 2023 is likely to be another prosperous year of growth.