Around $20bn of catastrophe bond issuance possible, market growth could soar

The stage is being set for what could be the most significant year of growth the catastrophe bond asset class has ever experienced, as forecasts that new issuance could approach $20 billion suggest outright cat bond market growth of more than $8 billion is possible in 2024.

Global asset manager GAM Investments has forecasted that catastrophe bond issuance could be around the $20 billion mark in 2024, which would result in the biggest increase in the size of the outstanding cat bond market ever.

We’ve spoken with some sources on the origination and broking side of the cat bond market, who are also anticipating that earlier forecasts for between $15 billion and $16 billion of new issuance may have been underdone.

Market sources now suggest that significant interest in cat bonds is being shown by cedents and potential sponsors, while there are a number of deals already in the pipeline for 2024 that, if pricing is conducive, could result in particularly large sizes being issued.

There are a number of buyers of large reinsurance towers that require more coverage this year and if the cat bond market remains an attractive source of complementary reinsurance and retrocession, it’s expected deal-flow could eclipse last year’s record, it now seems.

Last year, 2023, saw the most significant single year of catastrophe bond market issuance and also growth.

Cat bond issuance reached almost $16.5 billion across all the deals we tracked, which includes 144A property cat bonds, cat bonds covering other lines of business and some private cat bonds.

As a result, risk capital outstanding rose from just over $37.9 billion at the end of 2022, to almost $45 billion at the end of 2023, with outright market growth of just over $7 billion recorded for the year.

Now, with scheduled 144A catastrophe bond maturities of just over $11 billion expected for 2024, issuance approaching the $20 billion mark would drive another significant increase in market size.

It could take the outstanding catastrophe bond market to around the $50 billion mark, which would be another significant milestone for the marketplace and drive a consecutive year of record cat bond market growth.

In a recent article, GAM Investments specialist Ralph Gasser explained that his firm expects planned catastrophe bond issuance to be around the US $20 billion mark this year.

At the same time, the higher spread levels in the cat bond market are proving an attraction to investors, helping to boost available capacity for cat bond cedents.

“Spreads for cat bonds are still high by historical standards and are expected to remain elevated for the foreseeable future. The key driver behind this is the supply/demand mismatch in the market for cat bonds,” Gasser explained.

“For 2024, for example, we expect to see planned issuance totalling about USD 20 billion, while bond maturities and coupon payments are set to total approximately USD 15 billion. For all planned issuance to be placed successfully, investors will need to be lured with attractive spreads to cover the expected shortfall,” he continued.

As a reminder, GAM Investments offers a range of catastrophe bond funds managed by specialist Fermat Capital Management, including the UCITS strategy GAM Star Cat Bond Fund.

As a result, such a forecast is likely well-informed, given Fermat’s positioning as the largest manager of catastrophe bond assets in the world.

It’s also backed up by the information we’re hearing from sources, about the pipeline for new issuance being set to increase as the year goes on, making issuance of close to $20 billion a real possibility if market conditions remain supportive of cedent execution.

Gasser highlights an expected roughly $15 billion of maturities and coupon payments this year.

With somewhere between $11 billion and $11.5 billion of maturities scheduled for full-year 2024, plus a just over 7.5% average spread across the stock of outstanding cat bonds that would drive more than $3.2 billion of spread payments alone, that figure stacks up against Artemis’ data as well.

Gasser explains that for investors looking at corporate credit fixed income investments, the relative attraction of insurance-linked securities (ILS) may be higher at this time, “both strategically and tactically.”

The spread multiple of a reference set of catastrophe bonds, versus corporate credit assets, is significantly higher.

The reference portfolio of catastrophe bonds “currently features a high one-year forward expected loss-adjusted spread multiple of 3.9 times compared to only 1.3 times for an equally “credit” risk and maturity weighted US corporate bond portfolio. Very clearly, cat bonds provide for a much higher compensation per unit of risk taken,” Gasser explained.

He also notes that while the one-year forward expected loss may be 2.2% for the cat bond reference portfolio, “The realised annual capital loss for cat bonds over the past 20 years, however, averages only about 1%, ranging between 0% to 4% per single year.”

Leading Gasser of GAM to conclude, “Based on absolute and relative valuation, cat bonds remain, in my view, a compelling asset class to include in a fixed income portfolio allocation. And not just for return optimisation, but also risk diversification, given the low qualitative and quantitative correlation of cat bonds to most other traditional asset classes as well as little interest rate duration risk.”

$20 billion would be a landmark year for the cat bond asset class, but it will need all the stars to align and the cat bond market to remain compelling to both cedent and investor side for such a high target to be met, which makes it absolutely critical that discipline is maintained.

A decline in market discipline could make it easier to attract the necessary cedent pipeline for a $20 billion catastrophe bond year, but the capital may not be as supportive in this scenario and that could make hitting new highs a challenge for the cat bond market.

There is a three-way balancing act ahead, between capital supply, cedent demand for protection in cat bond form, and market discipline.

Maintaining the right balance could drive issuance and the outstanding market to new highs, meeting or exceeding these forecasts.

The Artemis Deal Directory lists all catastrophe bond and related transactions completed since the market was formed 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.