Cat bond issuance could be even larger in 2024: Fermat’s Nelson Seo

There is a chance that the catastrophe bond market sees an even more significant year of new issuance next year, as factors are going to continue to support the demand for risk transfer, according to Nelson Seo, Co-Founder and Managing Director of Fermat Capital Management.

This year, 2023, has seen issuance of new catastrophe bonds reach record levels, as our readers and those tracking our catastrophe bond database are only too aware.

While spreads have reduced over recent months, catastrophe bond market returns remain high and 2023 has been “one of the best performing years in the history of the catastrophe (cat) bonds and insurance-linked securities (ILS) markets,” Nelson Seo of Fermat Capital Management explains in a recent update to investors.

“In our view, the stage is set for similar conditions in 2024,” Seo continued, saying that dynamics persist that will continue to drive returns for cat bond investors, as a result of which, “We think the outlook for next year remains favourable for investors.”

Seo went on to say that, “Cat bond spreads had reached historical highs in December 2022 and somewhat abated throughout 2023 due to speculative capital inflows and increased coupon yields.

“While inflation is slowing down, pent-up demand and the impacts of the ‘new normal’ in replacement costs to be borne by primary insurers will support the demand for risk transfer in the foreseeable future.

“This means that cat bond issuance could be even larger in 2024, which should keep spreads buoyant.”

Already, January 2024 has three new catastrophe bonds scheduled for completion and additional are expected.

The elevated pace of new cat bond issuance through the final quarter of 2023 is anticipated to continue into early 2024, while there are signs that some big buyers of reinsurance may look favourably at cat bonds for the upper-layers of their towers next year.

At the same time, cat bond fund managers have been successfully raising capital to absorb the new issuance flow and further inflows of capital are expected from investors next year, while the return of the market remains elevated.

With losses minimal in 2023, these capital flows will continue to pressure prices it seems, although the market remains determined to sustain returns at a higher level than they had previously declined to in the last soft reinsurance market environment.

Seo went on to explain that, “Beyond 2024, barring any major catastrophes, spreads are likely to revert to normal levels.”

But added that, “With a moderate exposure to spread duration in the portfolios, when spreads inevitably compress, investors could enjoy a positive outcome.”