So far in 2024, the insurance-linked securities (ILS) market has seen significant growth, with the volume of alternative capital in the global reinsurance industry increasing to a record high of $110 billion through the second quarter, as reported by insurance and reinsurance broker Aon.
Aon’s mid-year 2024 report reveals that each of the last three quarters set new records for catastrophe bond issuance, a sub-segment of the ILS space.
For the first time, over $8 billion of catastrophe bonds were issued in a single quarter, with Q2’24 seeing an increase to $8.34 billion from $6.92 billion in Q2’23, which boosted the total outstanding catastrophe bond volume from $41 billion to $46 billion, according to Aon’s data.
This growth was fueled by both supply and demand factors. Insurers continued issuing new bonds ahead of the hurricane season, driven by sponsors’ need for more capacity beyond traditional reinsurance.
The market also saw three transactions sponsored by Japanese insurers earlier this year, though the main focus has been on US wind exposure. In total, insurance companies issued $5.78 billion in new bonds during the first half of 2024.
Aon noted that in the first half of 2024, reinsurers focused on issuing industry index-based catastrophe bonds. In Q1’24, capital supply exceeded demand, tightening secondary spreads by up to 14% by March 31. In Q2, reinsurers sought similar pricing from investors, but the favourable pricing for index buyers was short-lived as spreads widened significantly, returning to levels seen in Q4’23 by mid-May.
Primary insurers also faced higher spreads as the market adjusted. Despite issuing a record $10.64 billion since March, reinsurers could have issued more if there had been greater investor capital available for industry index-based catastrophe bonds, says the broker.
Aon also highlighted the growing sidecar market, which has seen several significant transactions closing in Q2, with over $1 billion of capital entering in the past year. This growth is due to investors seeking returns from strong expected margins in proportional structures.
Overall, Aon estimates that ILS capital has increased by roughly 2% to $110 billion from the $108 billion recorded at the end of 2023, adding to the significant growth over the past 15 months.
Aon stated, “Opportunistic investors have allocated across a range of strategies as historic reinsurance rate hardening has generated multiple opportunities and encouraged creative structuring. Expected returns are highest in property catastrophe portfolios, and investors have gravitated towards partnerships based on alignment, track record and collateral efficiency.
“Casualty investors consider these factors important as well but are more focused on investment guideline flexibility, leverage and transaction duration as they establish bilateral arrangements where investors can manage the underlying collateral.
“Specialty portfolios have also captured the attention of investors as re/insurers seek growth capital and investors value the diversification benefits combined with reduced volatility (compared with cat-driven investments) offered via specialty portfolios.”
Aon concluded, “With the catastrophe bond market wrapping up its busiest quarter ever, and the sidecar market resurgent, all eyes turn towards the North Atlantic hurricane season. While many have forecasted this season to be active, it’s been promising to see strong investor fundamentals drive continued growth of the ILS market.”
