Cat bond market offers attractive entry point for investors: Neuberger Berman’s Burdick

After posting record levels of issuance so far in 2024, the catastrophe bond market appears poised to offer an attractive entry point for investors, according to Jack Burdick, an Associate at investment manager Neuberger Berman.

A record $8.4 billion of catastrophe bond and related insurance-linked securities (ILS) issuance occurred in the second quarter of 2024, taking first half issuance to a new high of $12.6 billion, and the outstanding market to a record $48 billion, according to Artemis’ data.

Looking back to Q1 ’23, supply and demand imbalances, exacerbated by hurricane Ian, led to a number of capacity constraints across traditional reinsurance markets.

However, Burdick notes that as the need for coverage increased, cat bond spreads peaked at approximately 11.5%, which is around 1.4 times higher than the spread seen in the 12 months prior, and 2.2 times higher than pricing levels seen during the relative low periods of 2017.

Burdick also highlights that the market has benefitted from underwriting improvements, which includes higher loss deductibles and more narrowly defined peril coverage.

Since April of this year, the industry has also witnessed a resurgence in elevated spreads, a potentially favorable shift for investors, Burdick added.

“Record-breaking issuance year-to-date, with over $12 billion of risk capital brought to market across 75 bonds, has helped spreads remain strong through 2024, and it is likely this year will surpass the record $15 billion issued in 2023,” he continued.

A mass of new issuers, notably the Government of Puerto Rico, have also made their presence felt by entering the market within the last year, which clearly demonstrates the robust growth trajectory and utility of catastrophe bonds as a form of risk transfer.

In June, the Government of Puerto Rico’s Autoridad de Asesoría Financiera y Agencia Fiscal (Fiscal Agency and Financial Advisory Authority) secured $282 million of parametric disaster insurance cover. The recent $85 million Puerto Rico Parametric Re Ltd. (Series 2024-1) catastrophe bond was seen as a key component that helped open the door to the capital markets.

According to Burdick, volatility has been on display across the market too, with both investor inflows and maturities at times creating an “overabundance of capital that depressed spreads, only to be met by high primary issuance volumes leading to sharp price corrections.”

“We saw this play out most clearly in Q2 2024 when, in the absence of capital inflows and large maturities, high issuance forced material spread widening,” he added.

Burdick concludes by highlighting that cat bonds’ historical performance remains strong, with sub-3% cumulative losses to the market, despite event activity over the past two decades.

“In light of record issuance volumes, improved structural features and resilient spreads, we believe the cat bond market is poised for continued growth and opportunity; furthermore, we think it could play a larger role within the reinsurance realm as more issuers embrace this form of risk transfer,” he said.

As we reported just last week, returns year-to-date are still historically high in catastrophe bonds, while the cat bond market’s yield remains at levels that indicate strong return potential for new investors.