The cat bond market is on track to surpass $50bn in notional outstanding in the near term, after growing 10.5% to $47.8bn last year, Swiss Re Capital Markets has said in its annual ILS Market Insights Report.
Some $17.2bn of primary issuance in 2024 was supported by maturities, elevated coupons and capital inflows, notably into UCITS funds.
This contributed to a compound annual growth rate of 9.7% in the cat bond market over the past five years.
Net cash flow into the cat bond market – the difference between capital returned to investors from maturing bonds and capital deployed by investors into new deals – was $4.7bn in 2024, demonstrating investor demand for the asset class, Swiss Re noted.
“This positive net cash flow into the market was supported by coupon returns and large inflows, most notably within UCITS funds and from new players, which largely offset redemptions during the year,” the report said.
Twelve new sponsors entered the market in 2024. Overall, 60% of new bonds had more than 90% expected loss contribution from US wind on a modelled basis.
Spreads and multiples on new deals increased towards the end of H1, however June maturities, accumulated coupons and new capital raises during the summer “replenished investor demand”, Swiss Re said.
The combination of healthy investor demand and lower numbers of new deals, following a record-breaking Q2 for primary issuance, resulted in a “significant decrease” of the new-issue multiple during the second half of 2024, the firm said.
The average issuance multiple was 3.3x in Q4 2024, down from 4.2x in Q1 and 4.7x in Q2, according to data tracked by this publication. It was significantly lower compared to 6.1x as of Q4 2022, when cat bond market pricing peaked, following Hurricane Ian.
Swiss Re’s report noted that market conditions last year enabled sponsors to upsize transactions and competitively test initial pricing terms.
In the secondary market, the report noted distinct “bid-heavy” periods during the year, as investors weighed the benefits of holding positions versus the opportunity of selling and investing in primary issuance.
The new year opened with “a much better balance between supply and demand for cash than observed in early Q4 2024”, Swiss Re said.
Market reaction to Milton versus Ian
The firm noted the cat bond market’s initial –1.34% contraction in the week ending 11 October, following Hurricane Milton, compared to –10% in the week post-landfall of Hurricane Ian in 2022.
Ian had “exacerbated an already difficult reinsurance and ILS market” as high inflation led to capacity issues and created a liquidity event for the ILS market, it said.
In contrast, Milton was viewed as an earnings event and absorbable by the market, due to strong returns from the year before.
Post-Milton, investors were still looking to buy cat bonds on the primary and secondary market, whereas post Ian investors were looking to sell to create capacity.
For more cat bond market data, visit Insurance Insider ILS’s Cat Bond Market Activity Tracker.