Cat bonds can generate investors $17.61bn of cash in 2024: Aon Securities

The catastrophe bond market is expected to generate investors as much as $17.61 billion in cash through 2024, from a combination of coupon payments and maturities, Aon Securities has estimated, which alongside inflows should be ample to help in absorbing what could be another record year of issuance.

Of course, that’s as long as there aren’t any principal losses throughout the year and with an entire hurricane season to go, at this stage there is no certainty on that.

But, the data underscores the significant cash liquidity that catastrophe bond investors have been benefiting from, which has helped the market to absorb new deals easily and expand itself.

Aon Securities, the investment banking and ILS broker-dealer arm of the reinsurance broker, explained that maturities were particularly strong in the first-quarter of 2024, at $4.65 billion.

Largely, this has been reinvested in the market and alongside inflows helped in absorbing the record new issuance seen in Q1 2024, which is analysed in Artemis’ new cat bond market report.

“In addition to maturities, investors have continued to generate strong coupon payments, a combination of still healthy spread levels and returns on collateral proceeds of over 5 percent for USD denominated catastrophe bonds,” Aon Securities said.

Adding, “In total, catastrophe bond maturities plus coupons generated investors more than $6.15 billion during the first quarter.”

The excess cash from this first-quarter haul will have spilled over into Q2 and will be helping cat bond sponsors secure the attractive execution that we’ve seen so far in deals that settle in April.

This could be a bit of a feature of the market through 2024, of elevated maturities and cash generation from the market stacking up towards the latter point of quarters and then driving excess cash for new issuance.

All of which means cat bond fund managers need to be cautious in their capital raising, given the cash they are generating is raising their assets under management naturally as well.

Aon Securities forecasts that, “This trend is set to continue (assuming no principal losses), with investors expecting to generate more than $17.61 billion of cash throughout 2024.”

With forecasts suggesting we could see around $20 billion of new catastrophe bond issuance through the full-year of 2024, that cash should be easily absorbed.

But it does not give much room for new inflows and capital raising to be deployed alongside it, suggesting a cash overhang may persist through much of the year.

Which goes some way towards explaining why analysts are now saying the cat bond market can no longer be considered hard.

Aon Securities said that, “Investors leverage coupon payments and maturities as the main source of capital for new issuance.”

But also added that the market has still been seeing some capital exit as well, “While there have been notable inflows of new capital to ILS investors as a result of the positive view on margins in the cat bond market, we also note cases of outflows, as end-investors seek to rebalance their overall allocation to ILS (in order to maintain a balanced portfolio of alternative assets), which performed well compared to other asset classes over the last 15 months or so.”

That should assist with balancing to a degree, but as catastrophe bonds gain in stature and popularity with global investors, including multi-asset managers and some larger fixed income specialists, it seems while the market remains so flush with cash the pressure on spreads may continue.