New cat bond sponsor interest to continue in 2025, alternative capital to keep flowing: Rousseau, Guy Carpenter
New sponsors should continue to come to the catastrophe bond and insurance-linked securities (ILS) market through the remainder of 2024 and into 2025, while inflows of alternative capital are expected to continue, according to Guy Carpenter’s CEO of EMEA and Global Capital Solutions, Laurent Rousseau.
Speaking this afternoon during a Guy Carpenter briefing held just in advance of the 2024 Monte Carlo Rendez-Vous event, Rousseau explained that reinsurance industry capital levels remain high, but he thinks that this time the cycle is different.
He highlighted strong returns for reinsurers and ILS capital providers, with some of the growth in sector capital coming from profits earned from reinsurance and catastrophe bond portfolios.
“These strong returns should be leading to greater supply of capital and reinsurers’ willingness to deploy capacity when terms and conditions are met,” Rousseau explained.
He continued, “Reinsurers continue to be well capitalised. Like 2023, at mid year 2024 there were no new startups or reinsurers of significant size, and existing reinsurers had no need to raise additional capital.
“Having said that, existing reinsurers did continue to generate significant retained earnings, fuelled both by underwriting returns and investment returns.
“Guy Carpenter and AM Best’s joint projection for 2024 is for a 9% increase in dedicated reinsurance capital to $620 billion. Reinsurers and ILS capital providers continue to have solid return expectations.
“Based on investment banks analyst forecasts, GC estimates that the incumbent industry can generate just over $100 billion of new equity capital across 2023 to 2026 from retained earnings. We estimate this at about $36 billion based on 2023.”
Rousseau moved on to discuss the ILS market and how it is positioned for the rest of the year and into 2025.
Rousseau explained, “Catastrophe bonds, once again, had a record first-half of the year, with Q2 being the most active quarter recorded ever. By June 30th, 51 different cat bonds had been brought to the 144A market for approximately $12.2 billion in limit placed.
“This takes the total outstanding notional amount to more than $45.2 billion. Therefore, from mid-2023, to mid-2024, there was $3.3 billion, or about an 8% increase in limit placed.
“Accelerated sponsor demand has persisted. 46 unique cedents have entered the cat bond market since January 1st, nine of which are new sponsors. This is a record for the first half of the year.”
He went on to say that the cat bond market did experience some tightening during the busy period of issuance earlier this year, while at the same time some investors locked in record high year-to-date return gains they had made.
Explaining that, “As a result in the property sector, ILS supported transactions were slightly challenged amid somewhat lower than expected mid-year raises.”
Looking to the outlook for the pipeline, Rousseau said, “As we approach year-end, a heavy maturity schedule of cat bonds should drive continued increased issuance activity, although availability of capital will depend upon the results of the 2024 wind season.
“Additionally, the interest in ILS remains high with first-time sponsors, which we expect to continue in Q4 2024 and Q1 2025.”
Moving on to discuss how the reinsurance cycle has differed this time around, Rousseau highlighted that in the past new capital would enter the market in scale in response to higher pricing.
He highlighted that, “This cycle is different. Today, we see continued inflow of alternative capital, but not of new companies, as such, in a large scale.
“However, alternative capital inflows have been strong and should continue to remain so.”
Summing up, Rousseau noted that reinsurance capital should therefore prove ample to satisfy the protection needs of clients.
“Following previous cyclical behaviours, we anticipate this level of capital growth, if achieved, to not only absorb rising demand, but to also intensify competition in the sector,” Rousseau said.
Concluding importantly that, “However, that competition is not expected to erode underwriting discipline, which has bolstered the sector and upgraded its health.
“Instead, competition will take shape in terms of which reinsurers are best catering to the needs of cedents and ultimately, the consumer.”
As we reported earlier today, speaking at our Artemis London 2024 conference yesterday Rousseau explained that the cycle is going to be about differentiation and where reinsurers can best support their clients.
He said this could mean a continuation of competitive pricing trends, with prices coming down potentially “quite meaningfully in the higher part of the programs.”
Which sets the stage for how reinsurers might approach their discussions on end of year renewals, as well as cedents expectations for cat bond pricing.
