Cat bonds a key focus of future capacity & price discussions: Goldman Sachs

In the insurance and reinsurance market, catastrophe bond issuance levels and activity are becoming a key focus for any investor discussions regarding industry capacity and price, according to equity analysts at Goldman Sachs.

In the analysts discussions with clients that are looking to invest in the equity of the insurance and reinsurance sector, it turns out that with the profile of the catastrophe bond market elevated once again, insurance-linked securities (ILS) in general are once more a key part of the conversation.

Over the history of the cat bond and ILS market, there have been times where the asset class has attracted more attention from main stream media and press sources.

This has always driven an upsurge in interest, we see this within Artemis’ own usage analytics and right now interest seems to still be rising.

While main stream media often gets the motivations of the ILS market and its investor base entirely wrong, it is once again raising awareness of catastrophe bonds, what they are and the benefits they can provide.

This is driving increased interest and putting cat bonds firmly at the centre of any discussion about the future of insurance and reinsurance, as well as conversations about where to find the value in re/insurance equities, it seems.

Goldman Sachs analyst team noted recently that catastrophe bond issuance is again “solid” in 2024 so far.

As we reported recently, first-half 2024 catastrophe bond issuance broke records.

Because of this, based on the analysts discussions with investors that are interested in the re/insurance market in general they state, “We believe this will remain a focus area in thinking about capacity supply and price momentum going forward.”

In fact, for many within the reinsurance industry, it has been impossible to have a discussion about capacity supply and the direction of prices without considering the cat bond and ILS market for well over a decade.

But now, the awareness of ILS and cat bonds is so high that traditional equity investors are back considering this when debating where the market is heading.

This translates to our experience, as interest in ILS from investors that are not typical ILS allocators is certainly growing.

Inbound enquiries from investors wondering how they can access an equity-like stream of returns from the insurance and reinsurance market without taking on all of the corporate, operational and execution risk of private, listed and startup companies, is once again growing.

We’ve spoken with private equity holders that have in the past backed what might have been termed “Class of” reinsurance startups and some of these large investors are now wondering if there are better ways, to access the returns of the market more efficiently and in a manner that allows them to make the most of the cycle as well.

As a result, reinsurance sidecars are firmly back in focus for some investors and could be a growing source of sector capital over the next few years, we believe.

There is also a lot to be said for structures that can provide that equity-like return stream to investors, but using ILS market plumbing to deliver it more directly from the underwriting results.

We could see some structural innovation as a result of this interest, over the coming years.

The Goldman Sachs analysts note that investor interest is also said to be recovering for collateralized reinsurance, industry-loss warranties (ILW’s) and sidecars, so they believe “2024 could be a year of continued growth in ILS capacity.”

Summarising, the analysts stated, “Alternative capital has continued to grow at a time when insurers have targeted diversified sources of capital to help alleviate upward pricing pressure sustained in the reinsurance and retrocession markets. Whilst this should support growth for primary insurers, we believe it will remain another focus area in thinking about capacity supply and price momentum going forward.”

Alongside capital considerations, investors are also still focused on price momentum and how that influences growth and margin expansion, the analysts from Goldman Sachs say.

While there are signs of some softening from the hard market peak in reinsurance, there remains no sign of a significant reversal on the tightness of terms, which should hold margins higher.

Hence, excess capital generation is likely to continue, among insurers and reinsurers, but still the use of alternative capital and ILS is expected to continue, as there remains some nerves around retaining too much catastrophe risk and at the same time demand for catastrophe reinsurance continues to rise around the world.

On catastrophe bonds as a focus of price and capacity discussions going forwards, yes that is set to continue to be the case.

But, how influential cat bonds are on general price remains to be seen, as with inflationary and exposure pressures still rising, it takes more than availability of reinsurance capital to stimulate any significant declines.

At the same time, cat bonds are certainly very supportive of industry capacity and becoming more so, cementing their role as a vital reinsurance and retrocession tool.