Alternative reinsurance capital: Catastrophe bond market

2024 began much the same as 2023 ended — with robust issuance of insurance-linked securities (ILS). Aon Securities estimates that overall ILS capital has grown to $108 billion, which marks a 16% increase since the beginning of 2023 and a new all-time high.

Of significance to the broader insurance and reinsurance markets, alternative capital has continued to grow at a time when Aon’s clients have targeted diversified sources of capital to help alleviate upward pricing pressure sustained in the reinsurance and retrocession markets.

Alternative Capital Deployment (Limit in $ bn)

Throughout the first quarter in 2024, Aon Securities noted robust new issuance of $3.87 billion, surpassing the first quarter in 2023 ($2.75 billion) and the previous Q1 record set in 2020 at $3.76 billion.

While issuance volume has remained high, it’s worth noting that investors benefited from a very healthy supply of catastrophe bond maturities throughout the first quarter.

In early January, investors received $3.14 billion from maturities, accumulating to $4.65 billion over the entire quarter.

Alongside these maturities, strong coupon payments contributed to their earnings, with returns on collateral proceeds exceeding 5% for USD denominated catastrophe bonds. Combined, maturities and coupons yielded over $6.15 billion for investors in the first quarter. Assuming no principal losses, the expectation is to generate over $17.61 billion throughout 2024.

Investors typically use coupon payments and maturities as primary sources of capital for new issuances. Although the catastrophe bond market has attracted new capital due to favorable margin views, some investors have withdrawn funds to rebalance their investments in Insurance-Linked Securities (ILS), aiming to maintain a diversified portfolio of alternative assets, which have performed well relative to other asset classes over the past 15 months.

Property Catastrophe Bonds Issued and Outstanding by Quarter ($ mn)

During the first quarter of 2024, as capital accumulated from coupon earnings and the maturation of catastrophe bonds (cat bonds), the spreads on these bonds tightened. This tightening was evident in new issuance spreads as well, notably in Aon Securities’ initial 2024 transaction for Fidelis.

Fidelis sought $150 million in annual aggregate protection against U.S. named storms and earthquakes, securing this coverage at pricing approximately 20% lower than similar year-end 2023 transactions.

This highlighted the ample capital available to investors at the start of the year and a strong demand for industry index-triggered cat bonds.

Secondary market spreads also tightened by around 10% since January 1, 2024. This tightening was favorable to sponsors, who launched 17 deals during this period.

Although the number of catastrophe bonds reaching the market reached a record high for the first quarter, the average deal size has not increased significantly; it stood at $228 million in 2024, slightly up from $223 million in 2023.

These figures indicate a growing interest from clients in the Insurance-Linked Securities (ILS) market to diversify risk transfer options amid a more competitive reinsurance landscape. Additionally, the cat bond market saw an increase in diversity among its participants, with nearly a quarter of the issuers in the first quarter of 2024 being first-time sponsors.

……………..

FULL Report — https://beinsure.com/reinsurance-capital-catastrophe-bond-market/