Insurance-Linked Securities Set for Big Year after Record First Half

The insurance-linked securities (ILS) market experienced a record level of new issuance during the first 6 months of this year, according to Swiss Re.

In its latest Insurance-Linked Securities Market Insights (Edition XXXIV)) report, Swiss Re says the ILS market saw nearly $9.85 billion in new issuance come to market across 64 tranches of notes during the first half of 2023. Both represented 6-month records for the ILS market, the August 2023 report says.

"While the first quarter kept pace with historical new issuance levels, issuance in the second quarter skyrocketed," the Swiss Re report says.

Swiss Re notes that ILS issuance during this year's first half exceeded the volume of issuance in all of 2022. Meanwhile, the first 6 months of this year alone would represent the fourth-highest year for new issuance, the report says.

The market also reached its highest level of total ILS volume outstanding during the year's first half at nearly $40.0 billion, according to Swiss Re. "With sustained growth through the first half of the year and lower levels of maturities in Q3 and early Q4, 2023 is likely to be another prosperous year of growth," Swiss Re says.

The Swiss Re report says several factors contributed to the ILS market reaching its new milestones during the first half. Among them was a significant amount of capital raising from ILS investors already participating in the market.

ILS sponsors and investors began this year in a "dislocated" market, Swiss Re says, with market participants questioning whether (re)insurance capacity needs could be met in the alternative capital market, particularly given that market capacity was constrained during the fourth quarter of 2022.

In addition, the market appeared to be facing a "market resetting event" following the more than $50 billion industry loss from Hurricane Ian, the report says. But investors globally saw an opportunity in the temporarily dislocated ILS market, Swiss Re says, and successfully raised money to support growing demand in the new issuance pipeline.

Following Hurricane Ian, at the end of last year's third quarter investors faced a challenging market in which catastrophe bond pricing dipped into lower stressed levels, Swiss Re says. "The secondary market for cat bonds at that time consisted of investors broadly looking for liquidity and, in many cases, selling bonds at a discount," the report says.

Throughout the first half of this year, however, loss reports from catastrophe bond sponsors showed Hurricane Ian's impact was less than what had been the consensus immediately following the event, Swiss Re says.

"Hurricane Ian was originally expected to be a massive event for the catastrophe bond market resulting in many different bonds taking losses; however, this has not been the case," the report says. The report says that while Swiss Re Capital Markets has seen some "loss creep" from the original estimates provided by issuers who ceded risk through catastrophe bonds, "this creep has not been significant enough to result in large losses to the bonds.

"In fact, there have been minimal losses to indemnity bonds due to Hurricane Ian," the report says. "There have been small losses to index-linked cat bonds, yet even these losses are well below original loss estimates before Hurricane Ian made landfall."

While Hurricane Ian proved to have a smaller impact, "All the while, sponsors found the cat bond market as a great alternative but an even better complement to a hardening traditional (re)insurance market," the Swiss Re report says. "The benefit of the market's price discovery performed exceptionally during 1H 2023 and attracted new and existing sponsors to issue cat bonds."

Swiss Re said the ILS market's resilience was demonstrated again early this year when capital was raised at least in part from new investors who saw a chance to enhance their portfolios with an attractive alternative asset.

The first half of 2023 also saw new issuers entering the ILS market, according to Swiss Re.

"This flurry of primary market activity was not just due to repeat sponsors," the report says. "There were six unique first-time sponsors that entered the market in 1H 2023, bringing risks to the market ranging from US wind to New Zealand earthquake."

Discussing the secondary market for insurance-linked securities, Swiss Re notes that while it wasn't as active as the record-breaking primary market during the first half of this year, the secondary market did remain active as investors looked to deploy newly raised or matured capital quickly.

While average trade spreads in the secondary market began the year significantly higher than historical averages due to the impact of Hurricane Ian, that influx of capital created a "bid-heavy" environment in the secondary market for much of the first half of 2023, which led to tighter spreads that are now trading only slightly above historical levels, the report says.

The secondary ILS market also saw changes in the valuations of some bonds following the release of loss information, Swiss Re says. "Many bonds that primarily cover Florida were heavily marked down after Hurricane Ian but continued to regain value in 2023," the report says. "However, some other bonds, namely the riskier Industry Index bonds, were further marked down as updated loss estimates for Hurricane Ian and other events were released."

Ultimately, barring any significant event, the ILS market should be positioned to set new records both for issue volume and the number of new issues in 2023, Swiss Re suggests.