Cat bond issuance reaches new highs with ILS capacity also seeing growth

Cat bond issuance reaches new highs with ILS capacity also seeing growth – AM Best | Insurance Business Asia

Reinsurance

Cat bond issuance reaches new highs with ILS capacity also seeing growth – AM Best

Increases largely in line with growing market demand and nat cat threats

Reinsurance

By
Kenneth Araullo

The insurance-linked securities (ILS) segment continues to experience modest growth in capacity, largely in line with market demand, according to a new report from AM Best.

The report estimates the property catastrophe bond market at approximately $45 billion by mid-year 2024, reflecting an increase of $3 billion.

The findings are part of AM Best’s “Best’s Market Segment Report: ILS Capacity Grows, as CAT Bonds Issuance Breaks Record,” which examines the global reinsurance industry ahead of the Rendez-Vous de Septembre in Monte Carlo.

At the close of 2023, Guy Carpenter and AM Best jointly estimated the ILS market capacity at roughly $100 billion. By mid-2024, this capacity increased as maturing deals were reinvested into new 2024 transactions, capital generated from record-breaking 2023 earnings was deployed, and a small amount of new capacity entered the market.

Emmanuel Modu, managing director of insurance-linked securities at AM Best, noted that one year of strong returns is unlikely to attract significant new capacity that would lead to substantial market softening.

The report also highlights that the 144A property catastrophe bond market set a new record for single-quarter issuance in the second quarter of 2024, reaching nearly $8 billion. This surpassed the previous record set last year.

Total issuance volume for 144A property catastrophe bonds was $11.9 billion in the first half of 2024, driven by both new sponsors and the upsizing of renewal deals.

Risk-adjusted rate changes in the ILS segment remained mostly flat or slightly down at mid-year renewals. Rate decreases were more evident in the higher layers of reinsurance towers, while rates tended to rise slightly in the lower layers, where capacity is more limited.

This rate trend was anticipated due to the strong returns achieved by traditional reinsurers and ILS managers in 2023, coupled with the absence of a major peak-peril catastrophe event since Hurricane Ian in 2022.

Wai Tang, senior director of insurance-linked securities at AM Best, commented that unless a significant peak-peril loss occurs in 2024, cedents may have more negotiating leverage during the Jan. 1, 2025, renewal season. However, capacity providers are likely to maintain discipline, as memories of poor returns in recent years remain fresh.

Munich Re estimates global insured natural catastrophe losses at $62 billion for the first half of 2024, with severe convective storms in the U.S. contributing the majority of these losses. Despite the high losses from these storms, the ILS market delivered relatively strong returns, as ILS managers have structured their deals to avoid frequency-driven losses, partially by using higher attachment points.

The Atlantic hurricane season, a critical period for ILS deals, was predicted to be very active. By early July, Hurricane Beryl had caused insured losses in the low to mid-single-digit billions across the Caribbean, Mexico, and the U.S. Initial modeled loss estimates for Hurricane Debby suggest a similarly low insured loss figure in the low single-digit billions.

These estimates indicate that most losses will not exceed ILS attachment points. However, a single large hurricane landfall in a densely insured area could have a significant impact on the ILS market.

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