Articles from January 2025

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A renewed interest in catastrophe bonds is being seen across the insurance-linked securities (ILS) market, as spreads have started to become more “attractive”, which indicates a favourable market entry point for new sponsors, according to Sandro Kriesch, Head of Insurance-Linked Securities (ILS), and Sophie Worsnop, Assistant Vice President, Acrisure Re Corporate Advisory & Solutions (ARCAS).

The reinsurance broker recently conducted a study, exploring how spreads for cat bonds that were issued throughout 2024 have gone on to develop, however the firm primarily focused on just US wind exposed bonds.

“As 2023 calendar year closed, final spreads exhibited a slight upward tendency in comparison to the initial spread guidance, indicating an anticipation of a hard underlying market,” Kriesch and Worsnop said.

“The first quarter of 2024 shifted towards a softer market, followed by a return to a harder stance in the second quarter, culminating in a substantial hardening at the end of Q2. Notably, some issues were not placed due to high pricing expectation during May and June (Titania 2024-1 Class B and Gateway 2024-3).”

When it comes to the fourth quarter of 2024, it’s important to highlight that no publicly available US hurricane exposed issues were observed during October, therefore ARCAS’ analysis only focused on the months of November and December.

According to Kriesch and Worsnop, these months exhibited a “very different picture”, where the final spreads were materially lower than the initial spread guidance mid-point, which signals a clear market softening.

“The factors contributing to the shift in sentiment are somewhat speculative, but we present two suppositions: 1) rumours of a softening in the underlying traditional reinsurance market, leading to an expectation of reduced pricing in cat bonds from buyers, and moreover 2) an approximate 2.5bn USD of maturing issuance during Dec 2024 and January 2025, driving investor interest and thus concessions on pricing reductions,” commented Kriesch and Worsnop.

“As more data from the 1/1 renewals becomes available, the 10% decline of final spread to initial spread guidance in both November and December becomes better contextualised within the broader reinsurance market, demonstrating the strength of the marriage of cat bonds with the underlying traditional placements.”

We discussed this in our latest quarterly cat bond report, where it showcases that on average, across the 29 tranches of notes that we have full pricing data for, all but three saw their final spread come down from the mid-point of initial guidance, which resulted in an average spread change of -10.8%.

Furthermore, Kriesch and Worsnop also explained how the broker’s study addressed how the perception of risk changed between the first half of 2024 to the fourth quarter.

“We observe two aspects during this period. First, the intercept: the price for capacity has come down substantially – actually significantly at the 99% level – and secondly, the slope: the risk sensitivity has roughly remained stable, indicating a continuous sensitivity to more (or less) risk (we also see a significant overall shift between the samples.).

“Thus, we would argue that the market for US Wind exposed cat bonds has become softer in terms of its pricing. In simple terms: sellers of capacity are generally willing to accept risk at lower spreads. It is worthwhile noticing that the 4Q24 sample is strongly aligned in that (with one exception) bonds’ spreads are priced very closely to the regression suggesting an agreement in principle of how risk should be remunerated; on the other hand, the 2H24 sample represents a market which seemed much more unsure regards the fair price of ceded risk as data is much more dispersed.”

They both went on, explaining that the firm used spread changes from initial guidance to final spread and the regression of expected loss vs spread of US hurricane exposed cat bonds during 2024 as “indicators of a softening market.”

“The latter shows strong changes supporting the change in risk sensitivity during that period towards a softer Cat bond market. On the other hand, the difference in final spread and initial spread guidance showed a clear change from May 24 to December 24.”

Adding: “The sizeable spreads that were paid led to some companies pulling (or postponing) their issue – however, come Nov/Dec 24 spreads are now much more benign.”

“We are encouraged by the renewed interest in cat bonds, not only because the spreads have become more attractive but also because the recent catastrophic event in California has highlighted the potential for unexpected capacity shortages in the traditional reinsurance market,” Kriesch and Worsnop concluded.

Renewed interest in cat bonds indicates favourable market entry point for new sponsors: Acrisure Re was published by: www.Artemis.bm
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Steel City Re is the world’s only provider of parametric reputation insurance offerings, leveraging a reputational value index that delivers more stable and higher returns for reinsurers and insurance-linked securities (ILS) investors, according to co-founder and CEO Nir Kossovsky.

Pittsburgh, Pennsylvania-headquartered Steel City Re is a reputation risk specialist, and the world’s only source of parametric, ESG, and reputation insurance solutions.

Founded in 2007, the company has been engaged in reputation measurement since 2001. It acquires data from a commercial data aggregator, which it then transforms into synthetic measures of reputational value through computer-driven algorithms that involve no human subjective influence. They are currently indexing reputation values for around 7000 public companies each week.

All of the firm’s insurance solutions are based on their reputation value index, and with demand for reputation insurance on the rise, we spoke with CEO Kossovsky about the index, how it works for protection buyers, and how the returns could be attractive to reinsurers and ILS investors.

Kossovsky explained that until recently, reputation insurance was shunned the same way as D&O liability insurance was in the past, in that directors of companies understood that it provided protection from real liability risk, but simply didn’t want to let anyone think that they might actually have a liability risk. Eventually, this attitude changed, and demand for liability insurance surged and led to the $25 billion market it is today.

“Fast forward 40 years, reputation insurance, the lesser cousin of liability insurance is now finding its place in the sun,” said Kossovsky. “Board members have moved beyond talking about reputation risk. In the past few months, reputation insurance has become a major topic of conversation.”

Like bankruptcy, attitudes change at first slowly, then suddenly. Interest first took hold during the 90s when that financial crisis of liquidity was triggered by a reputation crisis. This led regulators to realise how big the risk is to financial institutions, designated reputation risk a “named peril,” and subsequently demanded that banks report on reputation risk and how they manage it.

The issue then was how to accurately measure the risk, which is where Steel City Re came into the fold. Building on principles of behavioural economics and epistemology, it defined reputation value as the value created by stakeholders in the expectation of a benefit, and reputation risk as a threat to that value. The company created an index that captures that notion of value through forward-looking financial measures that are sensitive to issues of reputational significance: ethics, innovation, safety, security, stability, and quality. It created a measure of risk by quantifying the volatility of the value measure.

“We formalized a long-held tacit understanding that in the modern finance where intangible asset value dominates, reputation value usually rhymes with stock price,” he said, “while ensuring our insurance products did not become financial derivatives.”

This index provided Steel City Re with an independent measure of the intrinsic value of a firm based on the expected cash flows, which empirically did not always align with the stock price. This created an unexpected opportunity for arbitrage where value would be realised when those metrics converge.

“That’s how we first turned our model of reputation value into a business. We started selling data of reputation value and allowed various hedge funds to arbitrage,” explained Kossovsky.

“The next step was to do our own arbitrage. We designed an equity index comprising up to 57 companies—three companies from each of the 19 sectors. The key feature was that the companies had high reputation values and low stock prices. We named it the RepuStars Variety Corporate Reputation equity index (REPUVAR), which is now calculated by S&P Global,” he continued.

While the company’s model of reputation value made for an interesting investment thesis, the performance of the index over time affirmed the value of the metrics that came to underpin Steel City Re’s parametric insurance products.

“The algorithms for our reputation value index, our equity portfolio long and short indices, and our parametric insurance loss indices have been stable for two decades. The engineering begins with the raw data. We started with about 5500 companies that qualified for reputation value index calculation. At this point, we are averaging about 7200 companies each week whose data are incorporated into our system. We have an actuarial base of almost 9 million measures of reputation value,” said the CEO.

“When applied to insurance loss determination, our models operate like any other index. There’s a historic volatility to each individual company’s measures, which creates the normal operating boundaries, and if an insured company’s value falls below the normal operating boundaries, then they’re by definition impaired. The degree to which we allow an impairment before it triggers a loss—like a deductible— is a major factor for pricing an insurance solution. At the technical level, we offer a routine, run-of-the-mill, indexing-based insurance solution,” he added.

So, how might the index-based solutions be attractive to reinsurers and ILS investors? According to Kossovsky, this is threefold.

“We can price to target loss ratio. First, there’s much more stable returns because of lower loss variance. That’s because we have insight into the risk of each company individually, as well as on a portfolio basis. The single name risk data enable objective discriminatory underwriting, which means we can exclude outsized risk, objectively. Second, we see higher returns because our single-name data helps us with more precise pricing that dynamically adjusts for risk. And the third reason is that we can maintain underwriting discipline to sustain that target loss ratio. Our proprietary underwriting and pricing tools—our intellectual properties—are hard barriers for a competitive market to overcome.

“So, sustained loss ratios: stable returns, higher returns, and IP-protected extended returns over years,” explained Kossovsky.

Currently, interest in and demand for reputation insurance is on the rise, and this appears to be a national trend, as highlighted in a recent National Association of Corporate Directors blog, Directorship Online, which states that interest in early December 2024 was almost seven times higher than the trailing five-year average. Undoubtedly, this has been made that much more acute by the assassination of the UnitedHealth CEO in early December in New York, Kossovsky told Artemis.

“Two things are now destabilizing the Nash equilibrium for reputation insurance leading to a sudden and rapid rise in demand. First, a range of issues facing companies make the risk itself more unmanageable, ungovernable, and most important, unpredictable. And personal. Perceptions of the reputation risk have shifted from something that affects companies to something that affects individual corporate board members and executives.

“Second, concern by directors about telegraphing a potential reputation risk at their firm—like the fear about telegraphing a potential liability risk at their firm before the 1980’s—has been swept aside by the acute sense of personal risk by individual directors, and that capacity is relatively scarce. Only the better risks will be covered. As Nobel Laureate Michael Spence explained, objective discrimination and scarcity enable our reputation insurance solution to signal quality (of governance),” he said.

The new issues driving demand noted by Kossovsky include the corporate management and governance chaos that have been heightened by the US elections in 2024.

“Chaos is the right word. One hotbed of reputation risk involves climate and social issues. These are the things that companies once pledged to advance for global betterment, and now they’re retreating. Board members have linked their personal reputations to their firms’ ESG postures, so there’s a lot of cognitive dissonance and concern,” he said. “Especially among stakeholders. Many feel betrayed. The result is an emotionally activated populace willing an abler to target directors’ reputation through action: boycotts, strikes, social license withdrawals and more. An angry man who felt betrayed went further when he gunned down an executive in the streets of New York in December.”

Moreover, he explained, board members surveyed by PwC each year, in 2024, more than ever before, said they’re less likely to support a colleague who got in trouble. In fact, 25% of those surveyed said they’d be very happy to jettison two or more of their colleagues from their boards.

“Furthermore, key institutional investors in January declared that they want to punish leadership for reputation damage. And, on top of that, a recent survey found that key institutional investors are prepared to punish directors at some company if they’ve had a crisis at some other company.

“So, you put all of that together, and you can understand how a corporate director’s perspective would flip. Instead of it being somebody else who might have a reputation scandal, the average dutiful director doing their job can now see themselves being caught between stakeholders and shareholders—who cannot be collectively appeased —and for lack of a better word, be scapegoated,” said Kossovsky.

“The moment the risk shifts from “the other gal” to “it could be me,” it becomes viscerally real. What we’re hearing from our brokers is that Board members are recognising these factors, and they’re sensing that this has suddenly become a very personal, real risk that could impact their own economic security going forward,” he explained “They now understand that the going forward cost of lost future opportunities will not be covered by D&O liability insurance.”

Interestingly, Steel City Re started hearing from brokers earlier in 2024 when some of these factors became palpable, and after the election, the company started to receive more discrete outreaches.

“Can we buy this without it necessarily being known? Can we do this quietly because of that concern about the Nash equilibrium and triggering a “run-on-insurance” and a premium spike? So, it’s a very interesting time right now, which, of course, makes it very interesting for investors as well,” said Kossovsky.

Steel City Re predicts reputation risk for its clients via its Resilience Monitor, a predictive report, and the firm’s experienced consultants help firms manage the risk through business process modifications, captive insurance, and ultimately transfer it through the reinsurer’s parametric reputation insurance solution.

To end, Kossovsky highlighted some of the industry-wide benefits of parametric structures and what the future might hold for Steel City Re.

“Parametric models are a fundamental platform because they allow a rapid response to emerging risk. You don’t need to have a history of loss; you need to have a history of the parameter that correlates with a loss. If the insurance industry wanted, they could turn parametric technology into something like the MRNA technology for vaccines and initiate the insurance equivalent of the Covid vaccine’s operation warp speed.

“With parametric technology, you could respond to any emerging risk in weeks. If you stopped thinking about balance sheets and started thinking about how the client looks at the problem. If the board likes a solution because they think it will provide financial resilience, then surely everybody else in the company will be comfortable with parametric solutions and so on. This is what the brokers are trying to tell the insurers. Insurers want to see an example of how this plays out in reality, and I think we are that example,” he said.

Adding, “So, we’re fortunate that corporate governance is facing so many challenges and individual board members are deemed fair game for long-term economic harm by customers, employees, regulators and investors—none of which is covered by D&O liability insurance. When risk is unmanageable, ungovernable, and unpredictable, the only solution you can rely on is insurance.”

Steel City Re’s reputational value index offers stable, elevated returns for investors: CEO Kossovsky was published by: www.Artemis.bm
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According to Thad Hall, Partner and Head of insurance-linked securities (ILS) Solutions at Augment Risk, the risk capital and reinsurance solutions broking firm, the ongoing growth trend with alternative capital is expected to continue throughout 2025, given the high returns for ILS relative to other assets.

Global credit ratings agency AM Best revealed that alternative capital expanded by 7% in 2024, reaching a remarkable US$107 billion in 2024.

“In the past two years the Swiss Re Cat Bond Index has risen 19.7% and 17.3%. This level is comparable to public equities and ILS investors get the added benefit of a low correlation to other assets,” Hall said.

Hall also told us what he is hoping to see take place across the ILS market in 2025.

“More ILS funds expanding their products to include casualty risk. Also private credit investors entering the ILS market. ILS is a form of risk financing; private credit can add an asset with low correlation to loans and achieve attractive returns,” he commented.

Looking back at 2024, it was a memorable year for the catastrophe bond and ILS market. In the fourth quarter of the year, $4.5 billion of cat bond and related ILS market issuance was recorded, which managed to take the full-year 2024 total to a record $17.7 billion, while the outstanding market reached a new all-time-high of $49.5 billion.

Hall explained what the industry learned in 2024 in regards to cat bonds insurance and capital management.

“Capital solutions are favoured by clients and investors. A holistic approach to managing capital for insurers and reinsurers through structured reinsurance and ILS can create material economic value over time,” he commented.

A key topic that is often discussed across the insurance and reinsurance space is artificial intelligence (AI), with many organisations expanding their use of the technology.

However, AI, which is more of an underdeveloped area across the ILS space, is expected to receive more attention in 2025, according to Hall.

“We are exploring ways to expand the use of AI in the ILS process. Augment Risk has a data and analytics team who assists the ILS deal team with loss and risk-based capital modeling. There is a collaboration between these teams and Augment Risk’s CTO to develop greater AI capabilities.”

Switching attention now towards the investment side, we asked Hall to explain what he believes investors will be focusing on throughout 2025.

He explained that Augment Risk is focusing on a note structure to finance stable portfolios of casualty risk, in which the notes will have a fixed maturity and may be supported by an equity layer.

“We are working with several investors who can transact in note format. We would like to see this structure gain more traction as an option to bring capital to transforming vehicles,” he added.

Alternative capital growth to continue in 2025, given high returns for ILS: Thad Hall, Augment Risk was published by: www.Artemis.bm
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2024 was another record issuance year for the catastrophe bond market and with total alternative reinsurance capital reaching new heights, the way insurance-linked securities (ILS) managers and investors matched appropriate risk returns was a notable success, according to 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, around 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” more or less in line with expectations.

“Whereas last year, Q4 was very much an outsized number, this year, Q2 was very much the outsized number. And we’ve ended the year slightly above last year’s issuance with another record year,” said Dubinsky.

Artemis’ end of year cat bond and related ILS data, which is tracked slightly differently to how Gallagher Securities does it, but directionally ends up being the same, puts Q2 2024 issuance at $8.4 billion, the biggest quarter in the market’s history, and Q4 2024 issuance at $4.5 billion, which while down on Q4 2023’s record $5.6 billion for the quarter, is still a robust end to the year.

Together with a very strong Q1 and muted Q3, total 2024 issuance hit a record $17.7 billion, up on the previous annual record set in 2023 by more than 7%, according to Artemis’ data.

“We’re all expecting that the issuance level will continue to increase at a macro level, and it’s just there is that unpredictability for both sides to keep it in a good dynamic tension between the protection buyers and the investors, which is really what we saw, with the exception of Q2, for most of the last 12 months,” said Dubinsky. “There was maybe 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 need.”

Looking ahead to 2025, Dubinsky told Artemis that, in terms of challenges, 2025 will likely be similar to what the market saw in the second quarter of 2024.

“As the market has grown and investors have more money to put to work, which they certainly do, there is a timing question of matching up the deals coming to market and the available cash and trying to make it relatively predictable where execution will be. I think that is the major challenge, really, for the first half of the year and certainly for Q2,” said Dubinsky.

In terms of demand for ILS products and strategies 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 challenging, and things are starting to turn,” he said.

“So, I think, over time, we do anticipate that there could be more opportunities for investors to raise money and put it to work in illiquid / collateralized re strategies. But whether that’ll be in H1 2025, or whether it’s a little further down the line, I don’t think we have a precise crystal ball there,” added Dubinsky.

Of course, and as noted by Dubinsky, appetite for private ILS strategies in part depends on the returns available in the cat bond space.

“So long as the returns are healthy in the cat bond space, there’s less of an incentive for end investors, such as pension funds, to allocate to illiquid ILS strategies. But we’ve certainly seen a downward trend in spreads throughout 2024 and that will likely continue to some extent in 2025. So, it’s just that there’ll be an inflection point at some point, 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 thought what was particularly successful in 2024 was the way that the ILS managers and those investors who invest directly really found the risks that were the best fit for them, and the strategies and shared information,” explained Dubinsky.

He went on to describe cyber as a perfect example, as it’s not for everyone.

“There are certain investors and pension funds that said cyber risk is not for them just yet and others have really taken to it. And so, I think it’s really tailoring the strategies, tailoring the solutions, connecting the right risks that we as a broker have access to, to the right types of investors.

“So, there’s not a, I would say, homogenous approach, it’s more of this matching of appropriate risk returns, and that’s something that is extremely necessary to grow the market,” he said.

“Besides cyber, I’ll give you a couple other examples, which is, you can look at aggregate covers, and in general, many of the investors are still quite reluctant to support aggregate covers in the cat bond market or in illiquid ILS strategies, in either case. This is because of the performance that they had during the, let’s call it the past five to seven years. But a number of the investors have looked at that and said, you know what, it does make sense if it’s the right cedent and if it’s the right structure. And so, for those investors, it’s a growth area, but for the others, it’s still something where they are staying away for now.

“And so, we’re really seeing the growth of a slightly more fragmented market. And that is, I think, a good thing to satisfy all the diverse needs that are out there from cedents and from end investors,” concluded Dubinsky.

Read all of our interviews with ILS market and reinsurance sector professionals here.

ILS manager & investor success at matching risk returns vital for market growth: Dubinsky, Gallagher Securities was published by: www.Artemis.bm
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