The catastrophe bond market shattered records over the past year, with $12.2 billion in new transactions coming to market and total outstanding capital reaching an all-time high of $45.6 billion as of June 30, 2024, according to a report on the insurance lined securities (ILS) market from Aon.

The CAT bond market saw record-breaking level of issuance over the past year, with volume totaling over $17.9 billion across 76 transactions in the 12 months from July 2023 through June 2024.

“The past 12 months can be characterized as a year of records, and the growth of the ILS market comes at a time when risk transfer needs are at their greatest. Inflation, evolving weather trends, and ambitious moves to close the protection gap have all driven demands for greater insurance and reinsurance capacity,” stated Richard Pennay, CEO of Insurance-Linked Securities for Aon Securities LLC.

“The past 12 months can be characterized as a year of records, and the growth of the ILS market comes at a time when risk transfer needs are at their greatest. Inflation, evolving weather trends, and ambitious moves to close the protection gap have all driven demands for greater insurance and reinsurance capacity.

This record issuance fueled substantial growth in the overall catastrophe bond market, with two key factors driving this expansion, according to Aon: First, the coupon yield earned on outstanding CAT bonds over the 12-month period is estimated at roughly $6.2 billion. Additionally, new capital flowed into the market, chasing the attractive spread levels on offer compared to other alternative asset classes. Risk margins over the past year were notably wider on average compared to the previous five years, according to the report.

Growth in the ILS sidecar market provided an additional boost. New issuance and strong returns from existing sidecars pushed total outstanding sidecar volume to an estimated record of $10.0 billion, surpassing the previous peak of $8.4 billion set in 2015, the report noted. The return of past ILS investors who had waited out the soft market cycle, along with new investors drawn by the heightened returns, drove the resurgence in sidecar activity, the report noted.

Diversification of Sponsors and Risks

A highlight of the past year was the utilization of the CAT bond market by government and multinational sponsors, bringing more geographically diverse risk than that of regular issuers. Over 32% of the issuance volume over the 12 months ending June 30 came from government sponsors, compared to 28.4% in the five prior years, according to Aon.

Nearly $5.8 billion of issuance volume this year sponsored by government entities was led by a handful of cedents: the California Earthquake Authority ($880 million); Citizens Property Insurance Corp., which is Florida’s insurer of last resort ($1.1 billion); and the Texas Windstorm Insurance Association ($1.4 billion, its largest issuance ever), the report noted.

The market also benefited from a surge of primary insurer-sponsored transactions. Issuance volume from primary insurers jumped to nearly $9.3 billion from $5.6 billion in the previous 12-month period, Aon stated. In total, there were 36 distinct primary insurers that brought deals to market this year, compared with 25 the year prior, a 40% increase.

Evolving Market Characteristics

The relationship between aggregate issuance and market cycles was evident over the past year in the CAT bond market, according to Aon. Aggregate issuance, which involves bonds triggered by an accumulation of losses from multiple events, such as multiple severe convective storms, peaked in 2018-2019 before declining steadily until June 2022 as the market hardened, the report said.

However, after Hurricane Ian struck in 2022, an influx of capital led to softening rates. Subsequently, in the 12 months ending June 2024, the percentage of aggregate bonds increased to 44% from 39%, signaling renewed investor appetite for exposure to secondary peril risks, per the report.

Over the past year, more than 80% of indemnity issuance volume had an annualized expected loss of less than 3%. In contrast, 60% of index and parametric issuance volume fell into the 2-4% expected loss range, with another 32% between 5% and 6%, the report stated.

Meanwhile, the secondary market for CAT bonds played a complementary role to primary issuance.

Trading activity in the secondary market intensified in the final months of 2023 as primary issuance picked up and bonds matured, with significant two-way trading. In early 2024, an imbalance of capital led to spread tightening, but the market found equilibrium as a stream of new issuance absorbed excess capacity. This caused secondary spreads to widen rapidly in May and June, with most bonds dropping from above par in early May to well into the 90s by June, per the report.

Access the full report here. &