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Outlook 2024: Nelson Seo (Catastrophe bonds and insurance-linked securities)

Catastrophe bonds and insurance-linked securities – Issuance should keep spreads buoyant

December 2023

Challenges and opportunities: Click here to read GAM's investment managers' Outlooks for 2024

2023 has been one of the best performing years in the history of the catastrophe (cat) bonds and insurance-linked securities (ILS) markets. In our view, the stage is set for similar conditions in 2024.

The reinsurance market was marked by significant supply and demand imbalances in 2022 and 2023. The performance was impacted by spread widening in 2022, which was further exacerbated by Hurricane Ian. However, the fundamentals of high and persistent inflation drove the demand for reinsurance coverage, while the supply of reinsurance/ILS capital decreased. This resulted in the dramatic returns seen in 2023. As those dynamics persist, we think the outlook for next year remains favourable for investors.

Cat bond spreads had reached historical highs in December 2022 and somewhat abated throughout 2023 due to speculative capital inflows and increased coupon yields. While inflation is slowing down, pent-up demand and the impacts of the ‘new normal’ in replacement costs to be borne by primary insurers will support the demand for risk transfer in the foreseeable future. This means that cat bond issuance could be even larger in 2024, which should keep spreads buoyant.

Beyond 2024, barring any major catastrophes, spreads are likely to revert to normal levels. With a moderate exposure to spread duration in the portfolios, when spreads inevitably compress, investors could enjoy a positive outcome.

Important disclosures and information
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein 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 contained herein. Past performance is no indicator of 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 or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio nor represent any recommendations by the portfolio managers nor a guarantee that objectives will be realized.

This material contains forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.

Nelson Seo

Co-founder and managing director of Fermat Capital
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