SUBBED EMBARGO 8am ET - Swiss Re: ILS market to exceed $50bn outstanding notional mark in “near future”

By Michael Loney

Feb 4 - (The Insurer) - Following a record issuance of $17.2bn in 2024, the ILS market is poised to push past the $50bn outstanding notional mark soon, according to a new Swiss Re report.

Swiss Re said that the ILS market “continued the growth trend of recent years in 2024, with the last 12 months marked by a robust performance for cat bond investors in the absence of events large enough to have a significant impact on the market”.

The ILS market grew by 10.5 percent year on year to end 2024 at $47.8bn of total outstanding notional, and is “on track to exceed the $50bn mark of outstanding notional in the near future”, the reinsurer said.

“A large maturity pipeline across the year, complemented with elevated coupon returns and capital inflows, most notably for UCITS funds, have supported the growth of the outstanding notional in the market seen at year-end,” the report said.

A strong issuance pipeline contributed to the growth of the market despite the large volume of bonds maturing.

There was $17.2bn of primary issuance in 2024, driven by a very active Q2 and Q4. This was up from $15.6bn in 2023.

Issuance in the first half of 2024 totalled $12.3bn, which was more than any other full year of issuance except 2021 and 2023.

“Following the typical pause in issuances during the North Atlantic wind season, the pipeline slowly resumed in the aftermath of Hurricane Helene and Hurricane Milton, before finishing strongly in December,” the report said.

“Issuance activity was supported by the high level of available capacity, and lower impact than initially feared from those aforementioned hurricanes,” it added.

The primary issuances during 2024 outpaced maturities by $4.7bn, contributing to the 10.5 percent year-on-year growth of the total notional outstanding at the end of the year. This compares to a compound annual growth rate of the market over the last five years of 9.7 percent.

“Maturing capacity, coupon return, and large inflows have supported the growth of the market, which again saw a broad range of sponsors and perils covered through the issuance of 68 transactions,” the report said.

The first half of the year included nine new sponsors while the second half only had three.

“It is worth noting that contrary to last year, there were no new European sponsors seeking coverage for European perils, with the exception of Gareat which secured €100mn of capacity against French terrorism risks. The end of 2023 saw a surge in this kind of coverage,” the report said.

As with previous years, the ILS market was dominated by US perils in 2024, with nearly 60 percent of primary issuances having more than 90 percent expected loss contribution from US wind on a modelled basis.

However, 2024 saw $1.75bn of non-US coverage issued from both new sponsors, such as the Government of Puerto Rico and Talanx, and returning sponsors for various perils including Japan windstorm and earthquake, Italy earthquake, Europe windstorm, Mexico windstorm and earthquake and Jamaica windstorm

“On the non-nat cat side, cyber risks continue to grow presence in the market with two new issuances from the PoleStar Re program, $200mn of US morbidity risks were transferred to the capital markets at the beginning of the year, and a new risk, French terrorism, joins the list of risks transferred to the ILS market during the last quarter of 2024,” the report said.

The notional amount of US earthquake cover issued was the lowest since 2019 with only $1.1bn issued in 2024.

Spreads tightened in second half

Swiss Re noted that strong demand from investors seeking to deploy their capacity and the lack of buying opportunities on the secondary market led to a trend of spread tightening of primary issuance during the second part of the year.

“As a result, many transactions often upsized and competitively tested initial pricing terms,” the report said.

In Q4 the secondary market was impacted by the new primary issuance, which further reduced the cash positions in the market, and brought back the need to free up cash for new deals by selling in the secondary market.

“The market begins the new year with a much better balance between the supply and demand for cash than observed in early Q4 2024,” the report said.

The Swiss Re Global Cat Bond Total Return Index posted an annual return of 17.3 percent.

“Returns for investors as measured by the Swiss Re Cat Bond Total Return Index, although not as strong as in 2023, ended the year at solid levels that should consolidate the value proposition of the asset class in comparison to other credit products and maintain the attractiveness for new players in the space,” the report said.

While 2024 included numerous catastrophe events, the cat bond market did not incur losses from any of them directly, pending further loss developments and/or any further erosion on aggregate structures.

Swiss Re noted that losses were spread among a relatively high number of medium severity events as well as secondary perils such as wildfires, hailstorms, thunderstorms and floods. Most ILS instruments are designed to cover peak perils and trigger after very high severity events such as major earthquakes and hurricanes.

It added the impact of Helene and Milton on the ILS market has been minimal to date.

“However, events from prior years have continued to develop and resulted in recovery payments to sponsors of about $440mn,” the report said. “The main drivers of these being Hurricane Ian, Hurricane Otis, and Covid-19, as well as the 2023 Turkey earthquake and Winter storm Elliott.”