Cat bond pipeline ‘could break records’, says Gallagher Securities

According to information from Gallagher Securities, the pipeline of new catastrophe bond issues looks “potentially record high” as we enter the first half of 2023.

recordWriting in reinsurance broker Gallagher Re’s latest renewals report, Gallagher Securities’ Capital Markets and ILS team warns of a possible record period of new catastrophe bond issuance ahead.

However, while the catastrophe bond market pipeline looks particularly strong, the availability of capital to absorb these new issues will be essential for its full potential to be realized.

Overall, the Gallagher Securities team says catastrophe bonds remain in favor of investors, with the ability of the ILS market continuing to “move away from collateralized reinsurance towards cat bonds”.

Cat bonds have performed better for investors over the past five years and offer more liquidity, so investors in the cat bond asset class have avoided many of the challenges faced by investors in private ILS and the collateralized reinsurance or retrocession may have been faced.

But demand from ceding companies and potential sponsors is high at the moment and as many were unable to tap into the cat bond market in the second half of 2022, there may now be a pent-up demand for reinsurance protection backed by cat bonds.

Around the second quarter of 2022, many market watchers and brokers were clamoring for a record pipeline of cat bond sponsors.

But given difficult capital market conditions, resulting in less ILS capital being available than expected, and then Hurricane Ian in September, the cat cat bond market was unable to service all potential sponsors over the past last months of 2022.

Bringing us into a position where, with a difficult reinsurance renewal season where capacity was also less readily available, there is now pent-up demand to sponsor cat bonds, Artemis tells us.

Gallagher Securities’ commentary reflects this, as they state, “The cat bond pipeline is quite strong and potentially record-breaking for the first half of 2023.”

They warn, however, that “capacity constraints may make it difficult for certain transactions to succeed.”

This brings us back to the situation we discussed in an article last year, where we explained the importance of matching the catastrophe bond market pipeline to investor flows and available capital.

This remains essential as we enter the first half of 2023.

Gallagher Securities thinks things will get easier, however, saying that “as we approach 2023, conditions should improve as investors raise new capital to deploy.”

But, the broker cautions that “the speed at which this new money arrives is very uncertain”.

Read our brand new catastrophe bond market report here.

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