ILS capacity continues modest expansion amid record cat bond environment: AM Best

According to a new AM Best report, the capacity level in the insurance-linked securities (ILS) segment continues to grow at a “modest” pace, aligning with market demand rather than exceeding it.

As per the rating agency’s report, at year-end 2023, the capacity of the ILS market stood at approximately $100 billion.

By mid-2024, this capacity reportedly increased as funds from maturing deals were reinvested into new transactions for 2024. Additionally, some of the capital generated from the record-breaking earnings of 2023 was deployed, and a modest influx of new capacity entered the market.

Emmanuel Modu, managing director of insurance-linked securities at AM Best, added, “One year of great returns is probably not enough to draw in material amounts of new capacity that would significantly soften the market.”

AM Best’s report also noted that the 144A property catastrophe bond market broke its single-quarter issuance record in the second quarter of 2024, with issuance of nearly $8 billion, beating the record set in 2023.

The rating agency observed that the total issuance volume for 144A property catastrophe bonds reached $11.9 billion in the first half of 2024, driven by growth from both new sponsors and increased renewal deals. Meanwhile, the total property catastrophe bond market was estimated at approximately $45 billion by mid-year 2024, reflecting a $3 billion increase from the previous year.

On the back of this record first half, global reinsurance firm Swiss Re recently stated that the catastrophe bond market is on track to break another primary issuance record this year.

Turning back to AM Best’s report, the firm stated that risk-adjusted rate changes in the ILS segment were flat to slightly down overall at mid-year renewals.

At the same time, rate decreases in the more risk-remote layers of reinsurance towers were said to be more pronounced, but rates tended to rise slightly at the lower layers of the tower, where capacity is scarcer.

“The dampened rate activity was not unexpected given the strong returns achieved by traditional reinsurers and ILS managers in 2023, as well as the lack of a major peak-peril catastrophe event since Hurricane Ian in 2022,” AM Best added.

Wai Tang, senior director of insurance-linked securities at AM Best, said, “Barring a major peak peril loss event in 2024, cedents will have more room to negotiate at the Jan. 1, 2025, renewal season.

“However, capacity providers are highly motivated to maintain discipline because the poor returns of recent years are still fresh in their minds.”

This website states: The content on this site is sourced from the internet. If there is any infringement, please contact us and we will handle it promptly.