Catastrophe bond issuance set records in three of the past four quarters, pushing the market to $45.6 bn—an 18% rise. The catastrophe bond market drew capital inflows starting in early 2023 after Hurricane Ian’s landfall in September 2022, whose impact was less severe than anticipated, according to ILS Annual Report by Aon Securities.
Investors have benefited from wider risk margins, benefiting from the clear value of insurance-linked securities (ILS) diversification. This led to record returns in 2023, a trend persisting into 2024.
This sector’s strong performance arrived just as insurers, reinsurers, corporations, and governments faced an unprecedented demand for ILS capacity amid rising prices in insurance and reinsurance. These factors spurred a surge in new issuances from Q4 2023 to Q2 2024.
New issuance came from all corners of the market with a record-breaking 64 sponsors bringing 76 transactions in the past year. Issuing entities coming to this market for coverage for the first time along with several who brought their first transactions in a decade drew investor interest with more diverse offerings, and new perils all together.
Indeed, the introduction of cyber risk to cat bond investors for the first time ever was a groundbreaking step forward for risk buyers and seekers, alike. This new frontier lays the foundation for further growth in the ILS market, driven by a peril anticipated to be of increasing concern to businesses globally for years to come.
Catastrophe Bond Market Overview & ILS Market Size
The past 12 months can be characterized as a year of records for the catastrophe bond market: record breaking issuance for three of the past four quarters, including the largest-ever first half issuance volume for a calendar year, resulting in over $12.2 bn of new transactions coming to market.
Cumulatively, the twelve months ended with issuance volume totaling over $17.9 bn across 76 transactions.
Record issuance was supported by overwhelming growth of the cat bond market. With nearly $11 bn of maturities over the same twelve months, the market required over $6.9 bn of growth to sustain the issuance volume over this period.
Growth was driven by both coupon earned on outstanding issuance—estimated at roughly $6.2 bn over the twelve-month period—and inflows of new capital chasing attractive spread levels.
Total Issuance vs. Maturities
The widening risk premium in cat bonds aligned with an environment of rate hardening seen across the broader property reinsurance market throughout 2023.
The insurance-linked securities (ILS) segment continues to grow slowly, mainly keeping pace with market demand.
AM Best estimates the property catastrophe bond market reached approximately $45 bn by mid-2024, marking a $3 bn increase.
Sponsors, noting the relative value of the cat bond market to traditional reinsurance and the well-known benefits of purchasing cat bond protection seized the opportunity to bring new deals to market, ultimately leading to a demand for capital that outpaced supply by mid-year 2024.
Outstanding Property Catastrophe Bond Capacity
As demand for capital outstripped supply, prices in the secondary market responded in due course. The trend was particularly pronounced with index deals, where secondary spreads indexed to July 7, 2023, tightened first by 44.3%, and then spiked over 95% before mid-year 2024, as illustrated by the light blue line below.
Aon Pricing Index
Apart from the record setting issuance volume for the year, the past twelve months have also featured a diversity of sponsors and risks covered, including the arrival of the first-ever 144A cyber catastrophe bond. All told, five cyber catastrophe bonds were issued in the past year, totaling $575 mn in issuance.
While cyber risk accounts for just over 1% of the outstanding risk in the market, the development of a structure which supports the cession of systemic cyber risk to ILS investors represents a monumental feat, many years in the making.
Further, the structure sets the foundation from which sponsors can build on to bring more cyber risk to market, further diversifying investors’ portfolios.
The aforementioned transactions are just a handful of the record-breaking 64 sponsors that came to market during this twelve-month period, 20 more than the prior year, as noted in the exhibit below.
The demand for risk transfer capacity from the ILS market speaks to a trend in which sponsors observed relative value for the price of risk compared with traditional markets, and further, the overall growth in risk transfer capacity needs that resulted from several years of cumulative inflation and growth in the underlying insurance market.
Property Catastrophe Bond Sponsor Count
Investors fueled unprecedented growth through fresh capital and reinvested premiums, benefiting from increasingly diverse risk portfolios in terms of both peril and geography.
North America’s share of risk fell from 90% last year to 82%, indicating a shift toward global distribution.
With cat bond capacity now surpassing $45 bn, the market’s diversification appears sustainable, especially as investors continue to favor spreading risk. This broader distribution of risk reinforces the stability and strength of the cat bond market.
Property Cat Bond Issuance by Quarter: 2010 to 2024
Higher potential returns in property sidecars have been driven by historically elevated premium rates, more remote attachment levels for underlying treaties, and narrowed coverage definitions.
Importantly, the property sidecar cycle is being driven not only by reinsurance portfolios but also insurance portfolios. Insurers are looking to sidecars as a source of proportional reinsurance to address the increased earnings volatility from higher excess of loss retentions.
Growth in ILS Sidecar Market
Apart from cat bonds, the new issue sidecar market continued its own reemergence as investors supported property portfolios similar to past cycles as well as innovative casualty structures.
New issuance combined with the strong returns from sidecars already outstanding to push total outstanding sidecar volume to a new estimated record of $10 bn compared to $7.1 bn in 2023.
This record surpasses the previous peak of outstanding volume: $8.4 bn set in 2015. Growth of the sidecar market was facilitated by the return of past ILS investors who waited out the soft market cycle and new investors attracted by heightened returns.
Alternative Reinsurance Capital
Casualty sidecars have also developed as the combination of improved casualty insurance pricing, higher interest rates, and substantial risk spreads for private credit instruments make these structures possible. Investors are seeking structures which provide long-dated investment float to manage within their asset management platforms.
According to ILS Market & Alternative Reinsurance Capital Report, the ILS market remains a significant capital source for insurance and reinsurance companies in 2024. Aon estimates alternative capital at $110 bn, with the catastrophe bond market growing to $45 bn (up $3 bn since January 1, 2024) and an annualized growth rate of 17% since early 2023. Increased capital inflows into catastrophe bonds reflect improved investor returns.
Alternative capital, which includes instruments such as catastrophe bonds, collateralized reinsurance, and sidecars, continues to gain traction. Investors are drawn to the sector by its non-correlated returns compared to traditional asset classes.
The growing interest in ILS has helped increase the overall capital pool, contributing to more competition and flexibility in pricing.
Primary Market: Record Issuance and Portfolio Diversity
Hurricane Ian and the broader macroeconomic events of 2022 resulted in a significant spike in reinsurance pricing, incentivizing abundant inflows of capital to the cat bond market from investors chasing record returns.
With the supply of capital high, prices tightened leading into the second half of 2023, thus motivating sponsors to bring new transactions to market.
Record Breaking Issuance Quarters
The supply driven increase in dealmaking also created some interesting pricing dynamics in the new issuance market. Initially, the influx of capital resulted in tighter pricing, resulting in a slew of issuance later in the second half of 2023.
Beyond the record-breaking issuance levels which were a highlight of the last twelve months, the diversity of risk ceded to the market has also been notable. In the past twelve months, fourteen sponsors brought transactions to market for the first time ever.
Since January 1, reinsurance market conditions have increasingly favored buyers. Last year began with limited capacity for property catastrophe coverage. However, by 2024, a significant increase in supply led to abundant capacity, driven by appealing risk-adjusted returns for property catastrophe reinsurance.
At the end of 2023, the total capital in the reinsurance industry reached $670 bn, nearly matching the peak levels of 2021. This growth was fueled by robust performance, a recovery in asset values, and a record year in the catastrophe bond markets.
The substantial reset in the property catastrophe reinsurance market on January 1, 2023, markedly improved the position of reinsurers. Despite global natural catastrophe insured losses totaling $118 bn in 2023—the fourth consecutive year losses surpassed $100 bn—many reinsurers reported strong financial outcomes.
Growth in Government and Insurer Sponsors
A highlight of the past year was the utilization of the cat bond market by government and multi-national sponsors, bringing risk often more geographically diverse than that of regular issuers.
Over 32% of the issuance volume over the twelve months beginning July 1, 2023 and ending June 30, 2024 came from government sponsors, compared to 28.4% in the five prior years.
This year’s government-sponsored issuance volume reached nearly $5.8 bn, led by key cedents: the California Earthquake Authority ($880 mn), Citizens ($1.1 bn), and the Texas Windstorm Insurance Association (TWIA) at $1.4 bn, marking TWIA’s largest issuance to date.
The International Bank for Reconstruction and Development (IBRD) also completed several issuances on behalf of Mexico and Jamaica, both of which have used the cat bond market previously.
Breakdown of Sponsor Type
By bringing sponsors with significant risk transfer needs into this market, the IBRD helps narrow the protection gap in countries with low insurance penetration, while offering further diversification for ILS investors.
Issuance volume from these insurers jumped to nearly $9.3 bn from $5.6 bn the previous year, underscoring the relative value insurers found in the ILS market over traditional options.
The influx of new sponsors suggests many will return in future years as they benefit from diversified capital sources in terms of cost and capacity. In total, 36 unique primary insurers brought deals to market this year, a 40% increase from 25 the year before.
Secondary ILS Market
The steady turnover of bonds continued into 2024; however, a later than expected pipeline for new issuance resulted in an imbalance (over-supply) of capital in the market and spreads began to quickly tighten. By the start of Q2 2024, a stream of new issuance came to market and balanced two-way flow was restored in the secondary market.
April 2024 appeared to be one of the busiest trading months since the onset of the Covid-19 pandemic in Q2 2020, and signaled a turning point in the market.
Investors who had been flush with cash in early April suddenly found themselves thin on capacity after absorbing $7.5 bn of new issuance across April and May, including three transactions of over $1 bn in size.
Secondary spreads widened rapidly in May and early June. Most bonds traded above par at the start of May but dropped well into the 90s by early June. One of the more notable price changes was on the Lightning Re bonds which hit its high in the mid-108s in March, only to trade as low as 98 in May.
The Herbie bonds that were issued at the start of the year saw their pricing drop into the 80s just a few months after they were issued. The entire market continued to widen through early June with both high expected loss industry index bonds and Florida wind bonds experiencing the greatest widening, partially as a result of capacity constraints and also due to the general risk apprehension that came on the heels of ominous forecasts for the North Atlantic hurricane season.
FAQ
The catastrophe bond market set issuance records in three of the last four quarters, reaching $45.6 bn—a rise of 18%. This growth started in early 2023, partly due to less severe impacts than expected from Hurricane Ian’s 2022 landfall.
Investors in insurance-linked securities (ILS) have benefited from wider risk margins and the clear value of diversification, resulting in record returns throughout 2023, a trend that has continued into 2024.
Demand for ILS capacity surged as insurers, reinsurers, corporations, and governments sought additional coverage amid rising prices in traditional insurance and reinsurance markets, leading to increased issuance from late 2023 through mid-2024.
New issuances have seen record participation, with 64 sponsors completing 76 transactions, including entities entering for the first time or returning after a decade, with new types of risks like cyber introduced to attract investors.
The introduction of cyber risk into catastrophe bonds has broadened the market, marking a first for risk buyers and investors. This expansion into cyber risk is expected to drive growth as global concern over cyber threats rises.
The cat bond market responded to high demand and capital inflows, but by Q2 2024, a balanced two-way flow returned as new issuances helped alleviate initial imbalances. Secondary market prices, especially for high-risk bonds, adjusted with notable fluctuations.
Government and multinational sponsors account for over 32% of issuance volume, often covering more geographically diverse risks. Their participation, especially through organizations like the IBRD, supports closing protection gaps in regions with low insurance penetration.
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AUTHOR: Richard Pennay – CEO Insurance-Linked Securities at Aon Securities