Fitch forecasts robust growth in alternative reinsurance capital for 2025
With capital levels of insurance-linked securities (ILS) reaching new highs in 2024, and returns across the market remaining attractive, “with particularly strong catastrophe bond issuance,” rating agency Fitch anticipates sustained robust growth in the supply of alternative reinsurance capital throughout 2025.
In a new report analysing the Bermuda reinsurance marketplace, Fitch states that these securities have performed better than other ILS during periods of high catastrophe losses, while also noting that ILS investors’ willingness to provide capital support “remained very strong” in 2024.
According to Fitch, increased alternative reinsurance capacity reflected the favourable rate environment for property catastrophe risks in 2024, following the significant price correction in the prior year and the corresponding attractive expected returns available within the market.
“The ILS market reached a high of USD113 billion at 9M24, fueled by a USD17 billion growth in catastrophe bonds, bringing total catastrophe bonds outstanding to USD47 billion at YE24 and eclipsing the previous year’s record by 11% according to Aon Corporation. Several Bermuda sponsors issued catastrophe bonds in 2024, including Arch Capital Group Ltd., Ariel Re Ltd., Aspen, Everest Group, Ltd., Fidelis Insurance Holdings Limited, and RenaissanceRe Holdings Ltd.,” Fitch said.
“Fitch expects continued strong supply growth in the alternative reinsurance capital market in 2025,” the agency commented.
Excluding significant losses, Fitch states that the ILS market is anticipated to be resilient over the near term.
“However, emerging risks, such as cyber, may show growth but will lack meaningful participation until more confidence is gained in the ability to model these threats,” the agency added.
In addition, catastrophe bond returns were particularly strong throughout 2024, as investors benefited from attractive yields on recently issued transactions and the generally higher positioning of the cat bonds in cedent catastrophe reinsurance towers.
On the other hand, ILS capacity supporting aggregate reinsurance has come under pressure from heightened severe storm activity seen across the US, along with the more recent wildfires in California.
Analysts at Fitch recently said that any realised catastrophe bond losses from the Los Angeles wildfires are expected to be small, also noting that these would not be anticipated to impede cat bond market issuance.
Fitch also commented on how global demand for reinsurance has been rising, as primary insurers cover increasing insured values from inflation and exposure growth and contend with increased risk, including from catastrophes, climate change, and uncertainty in economic and geopolitical conditions.
The agency noted that the higher returns have led reinsurers to deploy more capital, which ultimately pressured pricing at the January 1st renewals.
“Fitch anticipates that these softer conditions will continue at the midyear 2025 renewals in April (Asia-focused) and June/July (Florida),” the agency added.
