Cat bond momentum to continue in 2025 as market diversifies

By Aidan Gregory

Jan 21 - (The Insurer) - Insurance industry commentators are confident that the catastrophe bond market can continue its healthy growth trajectory in 2025 after the asset class delivered strong returns to investors last year.

The Swiss Re Cat Bond Index had a total return of 17.3 percent in 2024, the second-highest annual gain on record. The scope of the investable universe has also continued to expand, with 12 new sponsors entering the cat bond market last year, just shy of 2023’s record of 15, according to Gallagher Re.

A record volume of $17.7bn was raised in the cat bond market last year via 93 deals, data from Artemis suggests. That compares to 95 transactions that raised a combined $16.44bn in 2023, the data shows.

The momentum has carried over into 2025, with this year expected to be another big one for the asset class.

“We are as busy as we have ever been for January, post 1.1 renewals,” said Ben Brookes, managing director of insurance advisory at Moody’s in London.

“The renewals would appear to have been relatively successful, and prices have come off a bit, but cat bonds are still very attractive from a returns point of view if you compare it to historical risk pricing over the last 20 years of cat bond evolution, and this continues to drive strong demand from investors.”

Cat bonds emerged in the 1990s as an alternative way for property and casualty insurers and reinsurers to transfer risk to capital markets investors. They are high-yield debt instruments where issuers only receive payment if specific events, usually natural catastrophes such as earthquakes or hurricanes, occur.

The cat bond market offers insurers an alternative source of risk transfer outside of traditional reinsurance and retrocession in a world where the number of perils is rising every year.

“The market dynamics in 2024 were very strong,” said Sandro Kriesch, head of ILS at Acrisure Re in Zurich. “The number of new sponsors is where the long-term growth will come from. Existing sponsors may issue in larger size volume, but the sustainable growth will come from new sponsors."

From niche status following its inception, the issued volume of the cat bond market has steadily grown over the years, achieving a compound annual growth rate of roughly 10 percent a year since 2005, according to Acrisure Re.

“We have seen a number of new clients in 2024,” said Kriesch. “It makes me very hopeful that the volume can be sustained and further grow into a larger-sized market. We are currently around $50bn of outstanding volume. The issued volume has been growing by roughly 10 percent a year since 2005. That is a number which we think can be sustained.”

The cat bond market has also proliferated into new corners of the insurance market, such as cyber. UK specialty insurer Beazley pioneered the first ever cyber catastrophe bond in January 2023, raising $45mn. A year later in January 2024, Beazley returned with a second $140mn cyber cat bond, the first under rule 144A in the US.

"Five or six years ago, nobody could think of cat bond transactions from the cyber market, but now it is something we are seeing in the market," said a senior reinsurance executive.

This diversification is likely to be an important source of growth in the future, and a way of attracting new investors to the asset class.

“This is a diversifying asset class and institutional clients know that,” said Kriesch, noting that cyber cat bonds have seen around $500mn of investment from a few key sponsors.

“We are working towards introducing other lines of business to the market as well,” added Kriesch. “There is no reason why there could not be other lines of business like marine, offshore energy and aviation in the future as risk models evolve, albeit more on a retro basis.”

As well as further diversification, another important step in the evolution of the cat bond market will be to develop a more centralised system of data disclosure and exchange. Currently, the market is held back by the often opaque or inconsistent nature of the data that is disclosed to the investment community during the marketing of bonds.

“There are some elements to the way the market works which hold back growth a bit, particularly the data disclosures and the quality of data that is shared out to the investment community during a cat bond issuance,” said Brookes. “What becomes challenging is how you build a portfolio of these securities with different perspectives on all of these risks from different providers. In the offering circular of a cat bond, you might get state- or county-level aggregate data, but it is not really sufficient to understand the nuances of these risks when you put them together.”

“Funds are required to remodel the deals that come to them, and we help them, but they are often doing it on the basis of this aggregate information and that drives a fairly significant market inefficiency,” added Brookes. “It leads to uncertainty loadings, price inefficiency and capacity inefficiency.”

Nevertheless, the appetite of institutional investors to get exposure to the cat bond market remains strong and is unlikely to wane in 2025, with the market enjoying a “stronger start” this year than in 2025, according to Moody's.

“Last year was a record year and we have seen consistent 7-9 percent compound annual cat bond market growth for the last decade, and that is set to continue this year,” said Brookes. “There is nothing to suggest a break with that trend.”