The cat bond market was on track to transact $15.8bn of volumes for 2023 as of mid-December, with some deals remaining in the pipeline. This was by far the market’s largest-ever year, ahead of the $12.7bn issued in 2021.
In a 2024 outlook posted to distribution partner Gam’s website, Seo said this record could be topped in 2024 due to ongoing sponsor demand for cover.
“While inflation is slowing down, pent-up demand and the impacts of the ‘new normal’ in replacement costs to be borne by primary insurers will support the demand for risk transfer in the foreseeable future.”
Cat bond spreads have “somewhat abated” from their historical highs in December 2022 as more capital has returned to the sector, he noted.
But the Fermat co-founder said the outlook remains favourable for another strong year of returns.
“Beyond 2024, barring any major catastrophes, spreads are likely to revert to normal levels,” he wrote. But investors could still enjoy a positive outcome when spreads inevitably drop through maintaining “a moderate exposure to spread duration in the portfolios", he added.
The average weighted spread across all 2023 new cat bonds that had closed by mid-December was 8.46%.
Cat bond funds had returned 12% on average for the first 10 months of 2023, according to the Eurekahedge ILS Advisers index. Returns have been boosted by hard market spreads as well as higher yields from underlying collateral investments, which track short-term US treasuries.
