ILS manager & investor success at matching risk returns vital for market growth: Dubinsky, Gallagher Securities

2024 was another record issuance year for the catastrophe bond market and with total alternative reinsurance capital reaching new heights, the way insurance-linked securities (ILS) managers and investors matched appropriate risk returns was a notable success, according to Bill Dubinsky, Managing Director and CEO of Gallagher Securities.

We spoke with Dubinsky, who heads up the capital markets and ILS arm of reinsurance broker Gallagher Re, around the launch of the firm’s January 1st renewal report, to gauge his thoughts on the performance of the ILS market in 2024 and what 2025 might hold for the space.

For the catastrophe bond market, Dubinsky noted a “relatively busy year-end” more or less in line with expectations.

“Whereas last year, Q4 was very much an outsized number, this year, Q2 was very much the outsized number. And we’ve ended the year slightly above last year’s issuance with another record year,” said Dubinsky.

Artemis’ end of year cat bond and related ILS data, which is tracked slightly differently to how Gallagher Securities does it, but directionally ends up being the same, puts Q2 2024 issuance at $8.4 billion, the biggest quarter in the market’s history, and Q4 2024 issuance at $4.5 billion, which while down on Q4 2023’s record $5.6 billion for the quarter, is still a robust end to the year.

Together with a very strong Q1 and muted Q3, total 2024 issuance hit a record $17.7 billion, up on the previous annual record set in 2023 by more than 7%, according to Artemis’ data.

“We’re all expecting that the issuance level will continue to increase at a macro level, and it’s just there is that unpredictability for both sides to keep it in a good dynamic tension between the protection buyers and the investors, which is really what we saw, with the exception of Q2, for most of the last 12 months,” said Dubinsky. “There was maybe a one month period where things got out of whack, primarily for index triggered deals, but mostly it was relatively predictable, which is what we need.”

Looking ahead to 2025, Dubinsky told Artemis that, in terms of challenges, 2025 will likely be similar to what the market saw in the second quarter of 2024.

“As the market has grown and investors have more money to put to work, which they certainly do, there is a timing question of matching up the deals coming to market and the available cash and trying to make it relatively predictable where execution will be. I think that is the major challenge, really, for the first half of the year and certainly for Q2,” said Dubinsky.

In terms of demand for ILS products and strategies in 2025, Dubinsky expects healthy and robust demand for the cat bond product to persist but noted that it’s been somewhat of a down few years for the illiquid ILS space.

“Investors have had trouble raising money for illiquid ILS type strategies. Holding aside sidecars and things like that, but for excess of loss, that’s been challenging, and things are starting to turn,” he said.

“So, I think, over time, we do anticipate that there could be more opportunities for investors to raise money and put it to work in illiquid / collateralized re strategies. But whether that’ll be in H1 2025, or whether it’s a little further down the line, I don’t think we have a precise crystal ball there,” added Dubinsky.

Of course, and as noted by Dubinsky, appetite for private ILS strategies in part depends on the returns available in the cat bond space.

“So long as the returns are healthy in the cat bond space, there’s less of an incentive for end investors, such as pension funds, to allocate to illiquid ILS strategies. But we’ve certainly seen a downward trend in spreads throughout 2024 and that will likely continue to some extent in 2025. So, it’s just that there’ll be an inflection point at some point, but we don’t know exactly when,” said Dubinsky.

The ILS investor base continues to expand and is now very sophisticated and increasingly knowledgeable of the sector, and Dubinsky expects the approach of investors in 2024 to be replicated in 2025.

“I thought what was particularly successful in 2024 was the way that the ILS managers and those investors who invest directly really found the risks that were the best fit for them, and the strategies and shared information,” explained Dubinsky.

He went on to describe cyber as a perfect example, as it’s not for everyone.

“There are certain investors and pension funds that said cyber risk is not for them just yet and others have really taken to it. And so, I think it’s really tailoring the strategies, tailoring the solutions, connecting the right risks that we as a broker have access to, to the right types of investors.

“So, there’s not a, I would say, homogenous approach, it’s more of this matching of appropriate risk returns, and that’s something that is extremely necessary to grow the market,” he said.

“Besides cyber, I’ll give you a couple other examples, which is, you can look at aggregate covers, and in general, many of the investors are still quite reluctant to support aggregate covers in the cat bond market or in illiquid ILS strategies, in either case. This is because of the performance that they had during the, let’s call it the past five to seven years. But a number of the investors have looked at that and said, you know what, it does make sense if it’s the right cedent and if it’s the right structure. And so, for those investors, it’s a growth area, but for the others, it’s still something where they are staying away for now.

“And so, we’re really seeing the growth of a slightly more fragmented market. And that is, I think, a good thing to satisfy all the diverse needs that are out there from cedents and from end investors,” concluded Dubinsky.

Read all of our interviews with ILS market and reinsurance sector professionals here.