Cat bond market expected to see record growth in 2024: Schwartz, Twelve Capital

For a non-correlated asset class, catastrophe bond spreads are still attractive despite recent tightening, and with interest from sponsors and investors remaining high 2024 is expected to be another record year for the market, according to Etienne Schwartz, Managing Director and Head of Investment Management, Twelve Capital.

Zurich-headquartered cat bond and reinsurance investment manager, Twelve Capital, recently hosted a webinar focused on the development of the cat bond and insurance-linked securities (ILS) market on the back of a record-breaking year in 2023.

After an overview of the significant volume of growth in 2023, Schwartz noted the high but typical level of cat bond maturities in January.

“As a result of the maturities, a lot of cat bond managers were actually looking for investment content and that was basically driving up secondary market prices. And as a result, we saw some spread tightening over this period of time,” said Schwartz.

In February, he continued, the market turned once again with a net volume of issuances that Schwartz expects to accelerate in March, April, and May.

“We expect very healthy primary market issuance and very significant growth of the cat bond market overall,” he said.

As shown by the Artemis Deal Directory, the cat bond market is on track for a record first quarter in 2024, with issuance in the period poised to exceed $4 billion for just the second time ever and approach the $4.5 billion mark.

“So, the cat bond market has become more mature and secondary market liquidity increased. And we expect that we will have a record year in terms of market growth this year again,” continued Schwartz.

In terms of cat bond spreads, Schwartz explained that while they have come down from last year, they remain at around 12%, which Twelve Capital feels is “still quite attractive for a non-correlated asset class… with an expected loss of around 2%.”

To summarise, Schwartz reiterated that the cat bond market is both growing and diversifying.

“We saw and see more liquidity on the secondary market. And what we also see is that indemnity bonds, which are predominately coming to the primary market, now pay a bit more spread, we see around 750 to 800 basis points. So, not the same levels as we saw in 2023, but still very attractive levels in the cat bond space.

“Private ILS is growing and is very attractive at the moment. We see over 20 percentage of return.

“The risk level is a bit higher, but nevertheless, on a risk-adjusted basis, private ILS is a very attractive asset class at the moment,” said Schwartz.

The catastrophe bond market has shrunk slightly since the end of 2023, given the high-levels of maturing bonds through the start of the year.

While there are still around $1.5 billion in new catastrophe bonds still to settle in March and only $250 million in maturing bonds to come, the cat bond market may not achieve outright growth through the first-quarter of the year unless some of those still to settle bonds upsize, it seems.

But, through the rest of the year, scheduled maturities are now around $7.5 billion, which is a figure that could be easily beaten by new issuance, especially if we get close to the $20 billion forecasts, which would drive one of the most significant years of market size expansion in the cat bond market’s history.

You can analyse catastrophe bond market issuance and risk capital outstanding using this chart and break it down further to analyse cat bond issuance by month or quarter using this chart.