Catastrophe (cat) bonds and insurance-linked securities (ILS) experienced a tremendous amount of spread widening in 2022, setting up for what we think could be the best investment environment in the history of the ILS market for 2023.
This spread widening is due to a large imbalance in the supply and demand of reinsurance which is expected to last at least well beyond 2023. Further, while the hard market has been in place throughout 2022, Hurricane Ian’s landfall in late September has pushed the dynamics even more in favour of ILS investors.
Demand for reinsurance from primary insurance companies (particularly in the US) has been dramatically increasing, fuelled by rapid inflation in repair and replacement costs, and is showing no signs of abating. At the same time, supply of reinsurance has been shrinking over the past couple of years due to underwriting losses and trapped collateral, a dramatic reduction of retrocession capacity and the shrinking of reinsurer balance sheets. Brokers are estimating a current gap of USD 40 billion to USD 80 billion in reinsurance supply/demand and do not expect this to be bridged anytime in the medium term.
While Hurricane Ian will cause additional stress to the already hardened Florida hurricane market, we are currently seeing spreads widen significantly across all perils in all layers, a hallmark of a true hard market. And just as importantly, we believe the record high anticipated interest in catastrophe bond issuance for 2023 will create a rare situation where capacity deployment constraints are not the issue they have been in the past for fund subscribers.
As a reminder, cat bonds pay floating rate coupons, so rising interest rates in the US will only add to the total return on the bonds in 2023 (at least for US dollar denominated investors).
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is not a reliable indicator of future results or current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. There is no guarantee that forecasts will be realised.