The cat bond market has an issuance potential of $11.5 billion in 2023: Monnier, Swiss Re

The catastrophe bond market could see up to $11.5 billion in new issuance in 2023, but participants are likely to remain focused on balancing issuance against available capital, said Jean-Louis Monnier, Head Retro & ILS Structuring, Swiss Re Capital Markets at Artemis.

jean-louis-monnier-swiss-reIn an interview, Jean-Louis Monnier explained that Swiss Re Capital Markets anticipates a large issuance pipeline in the first half, with “total issuance for 2023 of around 11.5 billion”.

But he stressed the need for cat bond market participants to continue working to balance issuance with available capital, which means maturities will also be important.

“We expect growth to be more subdued in the first part of the year as issuance volume more closely matches maturity volume as sponsors adjust their deal size to risk bearing capacity. available on the market,” Monnier said.

On the capital side, Monnier expects investor inflows to increase as we move forward into 2023, with macroeconomic conditions and broader capital markets.

“Assuming there are no large cat losses, the relative value and actual yields of cat bonds should attract new investors to the market,” Monnier said.

He explained that “broader market forces, such as the fall in equities and fixed income, have created an overweight allocation to ILS among existing investors, which has led to rebalancing (exits).”

But added: “The stabilization and recent positive momentum in the equity and fixed income market should provide a more positive environment for increased cat bond allocations in 2023.”

Investor confidence is a hot topic for insurance stocks (ILS) at the moment, but Monnier believes catastrophe bonds can offer significant upside to investors this year, which should help bolster investor appetite for the class. of assets.

“Barring significant cat losses, we believe current implied yields on cat bonds could generate a sustained return in excess of $3 billion which should support market performance and issuance growth,” he said.

Adding that “investors should also look positively at historically high implied multiples across a wide range of perils and geographies.”

In general, the composition of emissions is unlikely to change too drastically in the future, Monnier believes.

Discussing where the growth of the ILS market in 2023 could come from, he said: “Similar to the previous year, however, we expect a greater share of emissions to come from regional players in the United States. seeking to supplement their traditional reinsurance placement and secure their multi-year capacity. .

“This is especially true for sponsors who are able to significantly increase rates in their regional markets.”

But tougher market conditions, in terms of catastrophe bond spreads that have followed higher reinsurance rates, could have an impact.

Monnier told us that “it is more difficult to predict globally, as it appears that some sponsors may decide to scale back or delay their plans to come into the ILS market in light of rate widening and a more limited capacity.

While capital to fund growth, if ceding companies are willing to sponsor cat bonds, should be available, he believes.

“Assuming no major catastrophic events, market growth will be largely funded by reinvestment of accrued interest and spreads on outstanding bonds, and to a lesser extent by a return to net inflows. capital in 2023,” explained Monnier.

Overall, Monnier of Swiss Re Capital Markets believes there is further growth potential in the catastrophe bond market.

“In terms of market size, yes,” he told us. “Especially with more US-based insurance companies coming into the market to buy.”

But the market needs to continue to give investors what they want.

As he went on to explain that “with spreads increasing, there is a general trend towards lower risk trades and per occurrence relative to aggregate triggers, as investors can seek to achieve their return objectives with less volatility.

“A few investors have also expressed a preference for index triggers over compensation and expect more simplified structures focused on remote layers. Reverting to basic/simplified transactions would lead to further expansion.

Find all our interviews with professionals from the ILS market and the reinsurance sector here.

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