Why have catastrophe bonds shown such exceptional growth?
Investors are drawn to catastrophe (CAT) bonds because of the exposure certainty, risk remote structure, attractive insurance risk spreads and collateral yields. We've also seen an increase in new sponsors. With more sponsors, there are more opportunities for investors to get involved and to diversify their portfolios.
An unusually intense hurricane season is being forecast and is showing signs of developing. What effect might this have on catastrophe re/insurance?
Investors understand that natural catastrophe losses are inevitable, but what they truly want to avoid is uncertainty and unexpected outcomes in how the contract responds to those losses. What they want to see is that the sector delivers an acceptable overall return over a three- to five-year horizon. This long-term perspective is crucial for investors to have confidence in the stability and profitability of their investments.
What other ILS vehicles are proving attractive?
Other attractive insurance-linked securities (ILS) vehicles for investors include sidecars, private quota share transactions, industry loss warranty capacity and CAT bonds (both private and public). This demonstrates growing interest in the ILS market. CAT bonds, in particular, continue to be appealing to investors due to their structured and transparent framework for exposure to catastrophe risk.
Overall, the ILS market offers diverse investment options for investors seeking diversification and access to different segments of the insurance market.
We've seen a number of cyber risk ILS vehicles launched over the last year. What are the prospects for this segment?
In 2023, Artex played a pivotal role in the launch of the first private cyber CAT bonds in the market. Initially, there was a rush to be the first to issue a full public SEC 144A transaction, driving much of the initial activity. However, since those public issuances, we've observed a slowdown in queries and market activity.
A core group of investors who have dedicated years to understanding and discussing cyber risk have emerged as specialists in this field. As we look ahead, the demand for cyber coverage is expected to persist.
It's important to note that the establishment of new vehicles and transactions in this space may take time, as efforts to expand the pool of investors comfortable with this risk will need to be intensified.
Lastly, there are ongoing concerns about systemic risk, which highlights the need for continued vigilance and risk management in the cyber insurance market.
Interest rates seem likely to fall in the US and the UK. What effect will this have on the ILS market?
We've seen growth in the ILS market during low interest rate environments before, so we don't expect a significant impact. The low correlation of these investments to the financial markets continues to be a catalyst for investor interest.
What risks do you see for the market?
Our industry is known for having a very short memory, so it's important to keep the past at the front of our minds. We need to maintain discipline on the underwriting side as well as in capital raising.
Investors want to see that the reinsurance industry has the discipline to be profitable over the long term. One year of profitability out of 10 isn't a compelling sector to invest in.
Portfolio managers have done a good job course-correcting on attachment points and terms and conditions over the last couple of years, and at Artex, we're hopeful that underwriter discipline will continue, and ILS investors will regain full confidence in the sector's ability to perform.
Where is Artex looking for growth in 2025?
Artex Capital Solutions (ACS) remains focused on providing the full suite of services that enables our clients to remain focused on portfolio management, pricing, underwriting and capital-raising. ACS has the talent and ability to manage and administer the rest of what our ILS clients require to be successful.
We expect to see growth in our relationship and service offering with existing Property and Casualty (P&C) carriers, managing general agents and life reinsurers.
What does Bermuda need to do to build on its leadership of the ILS sector?
Bermuda's success came with its government and regulator having a sincere desire to work with business leaders to foster sustainable business growth. As the jurisdiction matures and grows, it will be essential that this commercial mindset, alongside a robust regulatory framework, continues. We feel positive and we're excited about the future in Bermuda.
