Bermuda: Lack of New Players Is Supporting Strong Interest in ILS

Cat bond issuance in the opening quarter of this year picked up where the record-breaking 2023 left off, hitting a new Q1 high of $4.23 billion in a busy period for both repeat and new sponsors.

“Obviously, the volume of issuance and the number of new sponsors is good for the market, and it will be really interesting to see whether it continues, especially with the talk about rates starting to come down,” said Adderley in an interview with Artemis.

Given the amount of new sponsors in 2023 and so far in 2024, and the arrival of new risks such as cyber, Adderley is positive on the market outlook and the fact the sector has shown it can do new risks without breaking the bank.

After reaching new heights in 2023, cat bond spreads have come down somewhat so far in 2024 but still remain attractive, and this is expected to fuel interest throughout the year.

“With spreads last year hitting record highs, if you’re a private equity firm or similar that’s active in the space, you’re pretty happy with your return in what’s a short tail and liquid asset class.

“Now, compare that to a new start-up which in the first year isn’t liquid, and has all the costs of moving forward, so administration costs, talent, and everything else. And if anything, the cost of setting up a new reinsurer has become more expensive,” said Adderley.

“If investors like the re/insurance space, are willing and interested, and they sufficiently understand the risk, they know that they can get their feet wet by doing cat bonds first. It’s a type of re/insurance risk, it’s quicker and more liquid and easier to get into than a commercial re/insurer and last year the rates were good. And, even if they go down slightly this year, you’re still going to get a good return,” he continued.

In spite of the improved returns in the traditional reinsurance and alternative risk space, there’s been a notable lack of new market entrants, and capital raising from existing players has been limited.

“There’s been quite a lot of talk about various players in the ILS and reinsurance markets, but let’s be honest, how many of them have
actually raised capital? And until they do, are other, potential new entrants really going to take note? I would say no. In the discussions I’ve had, no one has told me a good story about raising capital,” said Adderley.

Interestingly, Adderley suggests that the now more protracted market cycle could be contributing to the lack of new capital entering the industry.

“In the past, the market would turn immediately, and people came in immediately to take advantage of that. Now, though, it seems more drawn out and over the last few years people have been saying it’s a hard market, when in fact, it’s only recently been a true hard market, and already you’re hearing talk of it starting to turn again.

“So, if you’re a potential new entrant on the side-lines and you’ve waited for the market to be truly hard, but you waited so long that it’s now not quite as good, have you missed the boat?”

“What you really need to do is come in during a soft market, say two years early into the cycle, and during those years focus on getting your systems and people in place. Of course, you try not to lose too much money while you’re gearing up, and then in year three, hopefully, the hard market hits and you’re in a perfect position with a clean balance sheet and you’ve worked out all the growing pains,” he explained.

“On the other side, more capital entering the commercial re/insurance space could be bad for the cat bond market, as it could drive down pricing faster. So, it’s a delicate balance,” concluded Adderley.

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First Published In Artemis, April 2024