Catastrophe bond issuance to explode to record high by 2023

Catastrophe bond issuance is on track to surpass the record set in 2023 as a cocktail of climate change, population density and inflation fuel growth in a market built around natural disasters.

New analysis by Swiss Re shows bond issuance well past $12 billion in the first half of 2024, which is on track to surpass the $15.6 billion issued in 2023. And with growth of the market by 7.4% in the six months to June, The first half of 2024 is now the most active for cat bond issuance on record, Swiss Re said.

The rise in issuance follows a year in which cat bonds have supported the world’s best-performing hedge fund strategy, increasing their appeal among investors. Cat bonds allow insurers to transfer risk to the capital markets. Investors can face huge losses if a predefined catastrophe strikes, but huge gains if it doesn’t. Last year, cat bonds returned 20%, their best annual performance on record.

For insurers looking to transfer natural disaster risk to capital markets, bonds “have proven to be a reliable risk management tool,” Jean-Louis Monnier, head of securities, said in an interview. insurance-related at Swiss Re.

The global cat bond market reached $46.5 billion in the first half of the year, Swiss Re said, noting that the figure does not include private deals.

For investors, the appeal of cat bonds was underlined last month when careful calibration of trigger terms protected them from losses even as Hurricane Beryl barreled through the Caribbean. As of June 30, cat bond investors were enjoying an average return of about 15%, comprising a risk premium of 10% and a money market rate of about 5%.

This is “significantly higher than similar credit products”, Swiss Re noted.

Meanwhile, cat bond investors are largely protected from increasingly common secondary hazards such as storms, floods and wildfires.

“These events have not directly caused losses to cat bonds, but are contributing to the erosion of various outstanding aggregate structures in the market,” Swiss Re’s report said.

For now, cat bond investors are navigating what is forecast to be an unusually active hurricane season. Swiss Re estimates that more than 70% of outstanding cat bonds are exposed to U.S. hurricanes, with the season typically peaking in August and September.

Assuming the market remains stable, 2024 is “on track to break another record for primary issuance,” Swiss Re said.

“We expect the fourth quarter to be active” for the show, Monnier said. “Barring any big market-disrupting event.”

Photo: Homes surrounded by flooding after Hurricane Beryl made landfall in Sargent, Texas, on July 8, 2024; photo credit: Eddie Seal/Bloomberg

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