Cat bond market pipeline outgrows available capital. 2024 could see active start

We’re told that the catastrophe bond market pipeline, of potential deals that could have launched during the fourth-quarter of this year, had become so large that the market is currently deemed to lack the necessary capital to execute on every issuance, resulting in expectations of a strong start to the first-quarter of 2024 for cat bonds.

It’s also left some ceding companies in a position where they have to choose between waiting to secure cat bond coverage after their January renewal, or switch strategy to secure more traditional and collateralised reinsurance protection at January 1st.

This could pose a challenge in some circumstances, as ceding companies want to know that capacity will be available for them.

However, we’re told that the vast majority of cedents (one broker-dealer source said all of their clients) are happy to wait, as they feel secure in the knowledge that the catastrophe bond market will be easily able to provide the capacity needed in the New Year and that capital will be available to satisfy their needs for reinsurance protection.

At this stage of the fourth-quarter, we already have just over $4 billion of new issuance listed in the Artemis Deal Directory for settlement during the Q4 period, across 144A cat bond deals and private cat bonds.

But sources tell us that the 144A catastrophe bond pipeline for Q4 2023 alone had been pitched at around the $5 billion to $5.5 billion mark, were broker-dealers to get every deal to market in the quarter that they have been contracted to help issue.

Already though, we’ve seen a number of cases of cat bonds taking longer than anticipated to price and settle, which is putting a little extra pressure on the pipeline, due to the way this can result in more cat bonds being in the market at one time than had originally been planned for, or for deals to get compressed towards the end of the year.

But, more important than cat bond pipeline congestion, is the fact that the market just doesn’t have the available liquidity to absorb over $5 billion of new cat bonds that all settle within the fourth-quarter of the year, we’re told.

As we entered Q4, there were between $2.2 billion and $2.5 billion of cat bonds scheduled to mature this quarter. It’s often challenging for us to tell exactly, as for some transactions we have end-of-risk-period dates, others the final maturity and redemption dates. But, clearly, maturities were nowhere near sufficient to fund all of the mooted fourth-quarter new cat bond issuance alone.

Which left a gap of around $3 billion in incremental cash needed, if the full pipeline of up to $5.5 billion of cat bond notes was going to get executed successfully within the period.

With roughly $4 billion slated to close in the quarter at this time, based on the current pipeline view we have and the transactions included in our Artemis Deal Directory, it’s still a very strong showing by the cat bond market. It means cat bond fund managers and direct investors have had to find at least $1.5 billion in incremental capital during the period, driving further expectations of strong market growth this year.

There are three cat bonds settling before the end of November, but then already ten new cat bonds that are currently scheduled for settlement before the end of the year, our Deal Directory shows.

With more than one month still to go, there is every chance the $4 billion figure increases by quarter-end, there is plenty of time for a few more deals to launch.

However, we’re hearing broker-dealers are actively holding some back now, as they are conscious that while the cat bond market has responded positively, raising new funds and growing the market, to ask fund managers and investors to absorb another $1.5 billion of deals, on top of the currently visible pipeline, might be a stretch too far.

Because of this, we’re now hearing that expectations for the first-quarter of 2024 are for a number of new cat bonds to be issued relatively early on, which could drive another busy period in Q1.

With record annual catastrophe bond issuance all but guaranteed for 2023, it looks like the catastrophe bond market will start 2024 just as strongly. While cat bond fund managers are going to be tasked with keeping the new inflows of money coming, to satisfy growing ceding company demand for reinsurance protection in cat bond form.

Stay tuned to Artemis as we move through the final weeks of the year for details of each cat bond as it prices and settles, as well as news on any new cat bonds that come to light, which could raise these forecasts for year-end totals even higher.

The Artemis Deal Directory lists all catastrophe bond and related transactions completed since the market’s first deal in the late 1990’s. The directory also lists the cat bonds waiting to settle, which are highlighted in green at the top of the list.

Analyse the catastrophe bond market using our charts and visualisations, which are kept up-to-date as every new transaction settles.

Download our free quarterly catastrophe bond market reports.

We track catastrophe bond and related ILS issuance data, the most prolific sponsors in the market, most active structuring and bookrunning banks and brokers, which risk modellers feature in cat bonds most frequently, plus much more.

Find all of our charts and data here, or via the Artemis Dashboard which provides a handy one-page view of cat bond market metrics.

All of these charts and visualisations are updated as soon as a new cat bond issuance is completed, or as older issuances mature.