Cat bond market set for record year as demand rises

The insurance-linked securities market is on pace to set a record for new issuance this year as buyers look to alternative capital markets for capacity and investors continue to allocate capital to the sector, sources said.

The ILS market has also received a boost from the emerging market for cyber insurance, with insurers first tapping the capital markets for cyber reinsurance in December 2023 and placing more bonds this year.

“The remainder of the fourth quarter looks robust, and we have seen a solid number of clients come to market earlier in the fourth quarter,” said Richard Pennay, New York-based CEO of Aon Securities, part of Aon PLC.

Given that the pace of issuance is continuing into the fourth quarter, “it is reasonable to expect that 2024 could, in fact, be the largest year on record for new issuance when compared to the $15.4 billion that was executed in 2023,” Mr. Pennay said.

Fitch Ratings Inc. said Nov. 1 that it expects 2024 new issuance, which stands at approximately $13 billion year to date, should top 2023’s record issuance of almost $16 billion.

Both cedents and investors continue to look to the ILS markets, said Jason Bolding, Jupiter, Florida-based global head of sales and distribution at Gallagher Securities, a division of Gallagher Re.

“The ILS market has become an integral component of the global reinsurance market ecosystem. Recent years of hard market conditions have also highlighted the value of securing multiyear capacity for cedents,” Mr. Bolding said.

Bond buyers have also found value in the ILS market, he said.

“From an investor perspective, we continue to observe capital flowing into the cat bond space, fueled by the attractive returns available during this hard market period,” Mr. Bolding said. “Cat bonds have delivered impressive returns, as demonstrated by the record high return of approximately 20% in 2023.”

“Investors find cat bonds to be a diversifying asset class which is well priced, robustly structured and proven in terms of historical performance,” said Shiv Kumar, president of GC Securities, the capital markets and ILS specialist unit of Guy Carpenter & Co. LLC.

Strong capital demand from the insurance sector will help drive the need for ILS growth.

“Entities are dealing with more frequent and powerful cat events, including flooding and wildfires, which will keep demand for property cat bonds strong,” said Jeff Mohrenweiser, Chicago-based senior director of global securities for Fitch Ratings Inc.

New demand has also come from the cyber sector.

Cyber represents a potential growth area for the ILS market, and there are six outstanding cyber bonds totaling $785 million from four different sponsors, Mr. Bolding said.

He added that the number of investors participating in the market also continues to grow. “Over time, as more cyber events occur and models recalibrate to actual events, we would anticipate even more investors will be drawn to this peril,” he said.

“Cyber bonds have gained traction over the last year, though any meaningful growth is more of a long-term goal,” Mr. Mohrenweiser said.

Sources were also bullish on the ILS market for 2025.

“We expect the market tone to remain positive in 2025 as favorable conditions persist. There is additional capital flowing into the cat bond space as investors have had good returns over the past two years,” Mr. Kumar said.

“The cat bond market will remain robust in 2025 primarily due to a firm reinsurance market shaped by recent catastrophe events around the world,” Mr. Mohrenweiser said.