As specialist non-ILS capital enters, the cat bond market stabilizes: Anger, GC Securities

More and more specialist non-ILS capital is entering the catastrophe bond market, like many investors who allocated before the return, and this is helping to stabilize the market, according to Cory Anger of GC Securities.

cory-anger-gc-titlesSpeaking to Artemis, Cory Anger, Managing Director of GC Securities, the capital markets and insurance-related securities (ILS) arm of reinsurance broker Guy Carpenter, explained some of the trends seen in the ILS market. , on the side of investors and products.

The key to another bumper year of catastrophe bond issuance is the resumption of capital flows, which can help stabilize market conditions and make issuance easier and results more predictable for sponsors.

Anger said returning investors are now seen, likely attracted by cat bond spreads returning to near-record highs.

Positively, this capital is helping balance a market that seemed capital constrained, or at least faced with capacity uncertainty in recent months.

“Due to widening risk spreads and more resilient structures, specialized non-ILS capital is re-entering the 144a catastrophe bond product, with most of this capital typically coming from institutions that have ILS investment experience at some point in the market’s 20-year history,” said Anger.

Adding that “This capital, although price sensitive, has a stabilizing influence on the amount of capacity available in the market.”

Which is positive for execution on the futures pipeline of new cat bond issues that Anger hopes to see in 2023.

These non-ILS investors have come and gone from the market over the years, but a growing number are allocators who last invested in catastrophe bonds more than a decade ago. Growing interest in the asset class is seen thanks to the much higher spread levels available in 2023, which have increased due to rising reinsurance prices.

However, investors have yet to see the clear benefits of allocating to the ILS market and catastrophe bonds, Anger said, with relative performance against other asset classes remaining strong despite the higher yields.

She explained, “It ultimately depends on whether the attributes of current ILS space yields (with an increase of around 50% from Q1 2022 to Q4 2022) are viewed favorably relative to traditional capital markets yields ( given the stress that global economies are facing due to inflation and rapidly rising interest rates).

“Investors appreciate the low correlation but remain concerned about assessing risk based on the impact of climate change.”

As for what needs to continue to happen, to help increase investor appetite for ILS and cat bonds, Anger highlighted two key areas, broader capital markets and risk modelling.

Anger believes that the capital markets as a whole must stabilize, to bring investors back to a new allocation.

“Stable interest rates and less volatile equity indices will help financial market returns stabilize,” she said.

While the other important element is to provide confidence in the risk modeling used by the ILS industry and undertaken by ILS investment managers.

Given that “models, exposure and/or modeling assumptions that align with recent losses and capture the impact of any climate change give investors confidence that they can properly assess and assume these risks will be key to regaining investor confidence in the ILS asset class. , Anger told us.

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