Cat Bond Issuance Grows as Investors Seek Returns and Climate-Risk Mitigation

The record pace of insurance-linked securities (ILS) issuance is set to continue as insurers and reinsurers increasingly turn to catastrophe (cat) bonds to manage risk, according to Fitch Ratings. This trend, Fitch said, is expected to deliver superior total returns for ILS investors alongside diversification benefits and a lower risk profile.

Insurers have increasingly relied on the ILS market to address unmet property risk and diversify counterparty exposure, Fitch said. Year-to-date 2024 cat bond issuance is $13 billion across 75 transactions, which Fitch expects could surpass 2023's record of $16 billion from 95 deals. Despite this growth, Fitch noted that cat bonds still represent less than 10 percent of the total reinsurance market, with nearly $48 billion outstanding.

According to Fitch, pricing for cat bonds has followed broader reinsurance market trends, with risk spreads in 2024 rising to the 6–8 percent range as issuers seek to transfer catastrophe-related risks. However, the rating agency said sponsors face higher costs related to bond issuance compared to direct reinsurance dealings. While investor demand has grown, Fitch observed that it has not yet driven enough competition to lower risk spreads.

Fitch said recent total returns for cat bonds have been particularly strong, fueled by high coupon rates that have outperformed other fixed-income assets. Since 2022, risk-adjusted returns have been especially attractive in the hardening reinsurance market, which Fitch characterized by increasing premiums, stricter underwriting, and limited capacity. The rating agency also noted that ILS bonds have benefited from rising yields for money market funds, which reached 4.5 percent to 5 percent in 2023 and 2024 after hovering near zero during the pandemic.

Returns in 2022 were hampered by conservative loss estimates for Hurricane Ian, but actual payouts in 2023 were lower than expected, which Fitch said boosted returns. The expected modeled loss has also slightly decreased, Fitch reported, with the average expected loss for the past 2 years at 2.0–2.25 percent, down from 2.5 percent in the prior 3 years.

Fitch noted that insured losses for 2024 have already exceeded $100 billion. Despite this, the rating agency said Hurricanes Helene and Milton are not expected to cause significant principal losses for cat bond investors. However, these storms will incrementally impact aggregate cat bonds still exposed to prior losses, according to Fitch.

Issuance of cat bonds is expected to pick up in the fourth quarter of 2024 as reinsurers prepare for the January 2025 renewal season, Fitch said. The rating agency anticipates that risk spreads will remain favorable for reinsurers due to ongoing supply and demand dynamics. However, Fitch cautioned that collateralized reinsurance structures could present increasing competition for the 144A cat bond market.