2024 was one other record issuance 12 months for the catastrophe bond market and with total alternative reinsurance capital reaching recent heights, the best way insurance-linked securities (ILS) managers and investors matched appropriate risk returns was a notable success, based on 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, across 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” roughly in keeping with expectations.
“Whereas last 12 months, Q4 was very much an outsized number, this 12 months, Q2 was very much the outsized number. And we’ve ended the 12 months barely above last 12 months’s issuance with one other record 12 months,” said Dubinsky.
Artemis’ end of 12 months cat bond and related ILS data, which is tracked barely in a different way to how Gallagher Securities does it, but directionally finally ends up being the identical, puts Q2 2024 issuance at $8.4 billion, the largest quarter out there’s history, and Q4 2024 issuance at $4.5 billion, which while down on Q4 2023’s record $5.6 billion for the quarter, remains to be a strong end to the 12 months.
Along with a really strong Q1 and muted Q3, total 2024 issuance hit a record $17.7 billion, up on the previous annual record set in 2023 by greater than 7%, based on Artemis’ data.
“We’re all expecting that the issuance level will proceed to extend at a macro level, and it’s just there may be that unpredictability for either side to maintain it in a very good dynamic tension between the protection buyers and the investors, which is absolutely what we saw, aside from Q2, for a lot of the last 12 months,” said Dubinsky. “There was perhaps 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 want.”
Waiting for 2025, Dubinsky told Artemis that, by way of challenges, 2025 will likely be just like what the market saw within the second quarter of 2024.
“Because the market has grown and investors have more cash to place to work, which they definitely do, there may be a timing query of matching up the deals coming to market and the available money and attempting to make it relatively predictable where execution shall be. I feel that’s the key challenge, really, for the primary half of the 12 months and positively for Q2,” said Dubinsky.
By way of demand for ILS products and techniques 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 difficult, and things are beginning to turn,” he said.
“So, I feel, over time, we do anticipate that there could possibly be more opportunities for investors to lift money and put it to work in illiquid / collateralized re strategies. But whether that’ll be in H1 2025, or whether it’s a bit further down the road, I don’t think we have now a precise crystal ball there,” added Dubinsky.
After all, and as noted by Dubinsky, appetite for personal ILS strategies partially relies on the returns available within the cat bond space.
“As long as the returns are healthy within the cat bond space, there’s less of an incentive for end investors, corresponding to pension funds, to allocate to illiquid ILS strategies. But we’ve definitely seen a downward trend in spreads throughout 2024 and that can likely proceed to some extent in 2025. So, it’s just that there’ll be an inflection point in some unspecified time in the future, 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 assumed what was particularly successful in 2024 was the best way that the ILS managers and people investors who invest directly really found the risks that were the very best fit for them, and the strategies and shared information,” explained Dubinsky.
He went on to explain cyber as an ideal example, because it’s not for everybody.
“There are particular investors and pension funds that said cyber risk will not be for them just yet and others have really taken to it. And so, I feel it’s really tailoring the strategies, tailoring the solutions, connecting the suitable risks that we as a broker have access to, to the suitable varieties of investors.
“So, there’s not a, I might say, homogenous approach, it’s more of this matching of appropriate risk returns, and that’s something that is amazingly needed to grow the market,” he said.
“Besides cyber, I’ll offer you a pair other examples, which is, you possibly can take a look at aggregate covers, and usually, lots of the investors are still quite reluctant to support aggregate covers within the cat bond market or in illiquid ILS strategies, in either case. It is because of the performance that that they had in the course of the, let’s call it the past five to seven years. But plenty of the investors have checked out that and said, what, it does make sense if it’s the suitable cedent and if it’s the suitable structure. And so, for those investors, it’s a growth area, but for the others, it’s still something where they’re staying away for now.
“And so, we’re really seeing the expansion of a rather more fragmented market. And that’s, I feel, a very good thing to satisfy all the various needs which might be on the market from cedents and from end investors,” concluded Dubinsky.
Read all of our interviews with ILS market and reinsurance sector professionals here.