Catastrophe Bond Issuance Reaches Record High Amid Modest ILS Capacity Growth

The insurance-linked securities (ILS) segment is experiencing modest capacity growth, closely aligned with market demand, according to a new report from AM Best. The report estimates the property catastrophe bond market at approximately $45 billion as of mid-2024, reflecting a $3 billion increase.

In the report, "ILS Capacity Grows, as CAT Bonds Issuance Breaks Record," AM Best, in collaboration with Guy Carpenter, estimated the ILS market's capacity at approximately $100 billion at the end of 2023. This capacity increased slightly by mid-2024 due to recycled capacity from maturing deals, the reinvestment of capital generated from record-breaking 2023 earnings, and a modest influx of new capital. 

"One year of great returns is probably not enough to draw in material amounts of new capacity that would significantly soften the market," said Emmanuel Modu, managing director of insurance-linked securities at AM Best. 

Notably, the 144A property catastrophe bond market set a new single-quarter issuance record in the second quarter of 2024, reaching nearly $8 billion, surpassing last year's record. Total issuance volume for these bonds reached $11.9 billion in the first half of 2024. This growth is driven by both new sponsors and the upsizing of renewal deals, the report notes. 

Despite these developments, risk-adjusted rate changes in the ILS segment remained relatively flat to slightly down overall during midyear renewals. Rate decreases were more significant in the risk-remote layers of reinsurance towers, while rates at the lower, more capacity-constrained layers saw slight increases. This subdued rate activity was anticipated given the strong returns achieved by both traditional reinsurers and ILS managers in 2023 and the absence of a major catastrophe event since Hurricane Ian in 2022. 

"Barring a major peak peril loss event in 2024, cedents will have more room to negotiate at the January 1, 2025, renewal season," said Wai Tang, senior director of insurance-linked securities at AM Best. "However, capacity providers are highly motivated to maintain discipline because the poor returns of recent years are still fresh in their minds." 

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