Cat bonds can’t dent hard market; competitive capital still tight

A record flow of cat bond issuance should do nothing to undercut the ongoing hard market for reinsurance, where the balance of other capital sources is sufficiently modest or even suppressed to ensure continued pricing discipline well into 2024, a key equity brokerage is telling investor clients.

“Continued growth in the cat bond market, in our view, is not incompatible with a prolonged hard reinsurance market,” analysts at Bank of America (BofA) said in research following record issuance in H1. “We are not concerned with this market development.”

In the BofA take, cat bonds are more of a compliment to other forms of capital than competitor, providing “additional capacity where traditional reinsurers might not want to compete or have exposure.” Record YTD issuance of $8.6 billion is only greasing the hard market.

The capital flows that would most work against rate hardening for traditional carriers are largely in check, a factor “likely to ensure ongoing discipline.”

Margins may not expand much further in the next stages of the hard market, but reinsurers may grab more of the margin they’ve achieved, BofA suspects. Analysts see “limited scope for further margin expansion in 2024,” but “upside to P&C Re top-line growth forecasts given attractive margins.”

Collateralised reinsurance would be “a greater competitive threat” given greater competition within layers of reinsurance programmes, but has been “notably quiet” in recent months, including neutral net flows to date in 2023.

That trend won’t change, analysts suspect. A poor track record for the sub-class and higher competition for capital via higher market yields makes it “unlikely” that collateralised reinsurance might recover soon.

And new pools of traditional capital have not sprung up as a result of the hard market. “This has surprised even large incumbents… though nobody is complaining,” Bank of America analysts say of their discussions with leadership throughout the industry.

“This leads us to a fairly constructive medium-term view for reinsurance market dynamics, as we believe capital is likely to remain disciplined for longer,” analysts wrote.

That leaves only the regular accretion of traditional capital, now at a somewhat elevated pace as asset values recover from 2022 losses and new higher margins create fuel capital accumulation. Traditional capital may have growth at a 5% rate in Q1 on such factors.

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