Cat bond issuance headed for record: Aon

A record volume of  catastrophe bonds will be issued in 2024 for the second straight year, according to Aon. 

Aon Securities said $17 billion will be issued this year, up from the previous record of $15.4 billion in 2023 as investment performance continued to drive demand. 

Richard Pennay (pictured), the new chief executive officer insurance-linked securities at Aon Securities, told Intelligent Insurer that the market should continue to grow in 2025. 

“We expect the market to continue to be robust going into 2025,” Pennay said, adding that a third consecutive year of all-time-high cat bond issuance in 2025 is “certainly a possibility”. 

“Investors have had significant capital going into the fourth quarter and thankfully the market has been able to really generate some reasonably sized deals, enabling investors to allocate that capital,” Pennay said. 

He told Intelligent Insurer that he is also encouraged by seeing large carriers like Allstate and American Family entering the market and tipped his hat to new entrants, calling out inaugural issuance from Mapfre for northeast US risks, the world's first South American cat bond from a primary carrier thanks to Talanx and a “very active period” from reinsurers. 

“The buyers just generally have more capital,” said Pennay. He said existing investors have watched returns stack up, be it rising cat bond pricing or the increased earnings on collateral, and new investors are being enticed to the market for similar benefits. 

New investors in the buyer pool include recently established dedicated ILS managers, but also investors coming from a multi-strategy investment management profile seeking the returns plus the diversification play, Pennay said. 

Bloomberg News also reported that investors remain bullish about the sector, despite a more active hurricane season than 2024 when the sector was the best performing alternative investment. 

It said that despite the increase in extreme weather, cat bonds are on track to return about 16%, after delivering a record 20% in 2023.

“We’ve had two fantastic years,” Dirk Schmelzer, senior fund manager at Plenum Investments, a Zurich-based firm that specializes in insurance-linked securities, told Bloomberg, 

“(That has) attracted new money,” he said.

Plenum estimates that the volume of catastrophe bonds in funds marketed under Europe’s UCITS label has risen roughly 49% since the end of 2022 to $13 billion at the end of September. 

Schmelzer said the key reasons why returns aren’t quite as high this year as they were in 2023 are the decline in Treasury rates and the rise in investor demand, which allowed issuers to price their bonds at slightly better terms.

It’s “automatically put a little pressure on cat-bond spreads,” he said. Yields  fell  from almost 14% at the end of May to about 10.3% at the end of November, according to Plenum.

Schmelzer said investors should expect “high single-digit to low double-digit returns” in 2025 unless there’s a major market shock.

Jeff Davis, partner and portfolio manager at  Elementum Advisors,  which manages about $4 billion of insurance-linked securities, said it’s now clear 2024 is “setting up to be the second-best year in the market’s history” for investors in cat bonds. And “now that spreads have come down, sponsors are buying more coverage”.

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