ILS market posts stellar returns yet again in 2024
ILS capacity reached a record high in 2024 as did issuance of natural catastrophe bonds, write AM Best’s Wai Tang and Matt Tuite.
Capacity in the insurance-linked securities (ILS) segment grew during 2024, reaching a record $107 billion by year end, according to a Guy Carpenter and AM Best estimation. Retained earnings and new capital inflows drove the capacity growth, both of which were helped by two consecutive years in which ILS did not incur any material catastrophe losses. Catastrophe bonds again achieved the greatest growth. By year-end 2024, capacity in the 144A natural catastrophe bond market hit more than $45 billion.
ILS managers believe the strong returns in the cat bond segment may intensify the appetite of investors for other forms of ILS. Cat bonds are positioned to serve as an entry point into the broader ILS market, from which investors may go on to explore opportunities to invest in other forms of ILS, such as private deals.
One area where that may be happening is in the sidecar space, where capacity also increased and ranged from an estimated $8 billion to $10 billion. Rate increases in the primary business underlying these quota share arrangements have made this ILS segment more attractive.
Industry loss warranty (ILW) capacity was roughly flat, in the $5 billion to $7 billion range, with the size of this segment dependent on overall supply and demand dynamics in the retrocession market.
Collateralised reinsurance capacity is estimated to be in the $45 billion to $50 billion range, with ILS managers hoping for growth in this segment following two solid years of investor returns. Spread compression in the cat bond market may make private ILS deals more attractive to investors.
Supply exceeds demand at January 2025 renewals
Property catastrophe capacity exceeded demand at the January 1, 2025, renewals, leading to overall risk-adjusted rate decreases. Demand grew as well, but not as much as supply. Coming off two years of strong returns, capacity providers were looking to expand and offered enough capacity to exceed demand at this renewal cycle. Inflationary pressure was less of a driver of demand than in recent renewals, so growth in demand can be attributed more to growth in exposure. However, despite a significant decline, inflation remains above central bank targets in some jurisdictions and may pressure demand at future renewals.
The Guy Carpenter Global Property Catastrophe Rate-on-Line Index reflects the result of the capacity supply and demand dynamics at January 1. The index fell by 6.6% at the January 2025 renewals, in contrast to an increase approaching 30% two years ago, a time of soaring demand and muted supply.
Although rates fell on average, renewal outcomes varied by account, layer and coverage type. Loss-free accounts experienced risk-adjusted rate declines of 5% to 15%, while loss-impacted accounts experienced a wider array of outcomes, ranging from flat to 30% increases. Retro capacity was widely available, coming off another essentially loss-free year, so those deals tended to experience larger rate decreases, in the 10% to 20% range. Capacity was also plentiful in the upper layers of reinsurance towers typically covered by cat bonds, a trend signaled in the pricing and sizing of cat bond deals during 2024. Capacity at lower layers and for aggregate covers remains more limited, which was reflected in renewals that were closer to flat.
Terms and conditions and attachment points were largely stable, even as rates fell on average. The hardening of these deal attributes at the January 2023 renewals was predicted to take longer to peel back than the significant rate increases that also characterised that renewal period, and the 2025 renewals confirm that prediction. Traditional reinsurers and ILS managers have emphasised the impact of the terms and attachment points on the strong returns of the past two years, so the stability of these attributes bodes well for 2025.
Heavy natural catastrophe insured loss volume
By improving terms and conditions and raising attachment points, capacity providers positioned themselves to achieve strong returns despite total insured natural catastrophe losses well over $100 billion. Swiss Re estimates global natural catastrophe insured losses in 2024 at $135 billion, up from $115 billion in 2023 and a good deal larger than the 10-year average of $98 billion. This marks the fifth year running that natural catastrophe insured losses eclipsed the $100 billion mark.
After a relatively benign US hurricane year in 2023, two major hurricanes, Helene and Milton, hit the US within two weeks in September/October 2024, combining for insured losses estimated as high as $50 billion. A mix of perils caused the massive 2024 insured loss number with severe convective storms (SCS) and flood again contributing strongly to the total. According to a Swiss Re estimate, SCS accounted for more than $51 billion of insured losses, down from $70 billion in 2023 but still significant. Europe experienced its second costliest year in flood losses, due to flooding in Central Europe during September and in Spain during October.
January insured loss volumes tend to be relatively mild, but that is not the case in 2025, given the horrific wildfires in the Los Angeles area. Insured loss estimates from the wildfires are in the $35 billion to $50 billion range, with considerable uncertainty due to factors such as demand surge, smoke damage, and potential subrogation.
As testament to the de-risking actions of the past few years, the ILS market performed well despite another year of heavy cat losses in 2024. Cat bonds performed strongly again because they generally cover more remote layers of risk that are insulated from SCS losses, although some outstanding aggregate bonds are exposed to that peril. However, only a few bonds thus far have been reported as being potentially impacted by Milton or Helene.
Additionally, cat bonds with exposure to the California wildfires, including some aggregate bonds, have seen negative price movements. These pricing shifts reflect not only direct losses owing to the recent wildfires, but also the probability of future losses through the rest of the year.
The California wildfires may contribute to rate hardening at the mid-year renewals for aggregate covers and covers with lower attachment points, especially given the potential for high SCS losses in the US during the next few months. However, the trend of rate softening for the higher, more risk-remote layers of reinsurance towers is unlikely to reverse.
“Cat bonds are positioned to serve as an entry point into the broader ILS market.”
Record 144A cat bond issuance
Issuance of 144A natural catastrophe bonds hit another record in 2024, driving the overall ILS capacity growth. The issuance volume of $16.6 billion beat the record of nearly $15 billion set in 2023. Cat bond deals consistently upsized well above their initial targets. On average, final issuance size was approximately 38% higher than the initial target, close to the 40% increase in 2023.
Issuance in 2024 was set for a major year because approximately $12 billion of outstanding cat bonds were scheduled to mature, providing capital that could be redeployed into 2024 issuances. Approximately 55% of sponsors that had a cat bond maturing in 2024 placed another issuance during the year and accounted for approximately $11 billion of issuance. Another $1.7 billion of issuance came from 11 new sponsors. The remaining $3.9 billion of issuance was attributable to returning sponsors who did not have a cat bond mature in 2024.
Other drivers of the record issuance include robust demand for capacity by cedents and investors that have been willing to deploy more capital to the segment because they are pleased with the returns and pricing. Another strong issuance year is likely, given that 2025 also started with a strong foundation of $11 billion of outstanding volume due to mature. The California wildfires at the beginning of this year are likely to erode a portion of cedents’ reinsurance towers, which will prompt additional demand for capacity.
Notable deals contribute to record issuance
Several notable issuances took place in 2024. In some cases, the issuances were especially notable because they showed that the cat bond market is growing not only in raw volume, but also in the breadth of territories, exposures, and sponsors. The growth is a positive sign for the long run health of the market by showing that diverse cedents can tap this market for capacity and that investors may have an ever-expanding set of risks that they can deploy capital towards.
Deal sizes were larger on average in 2024. The two largest transactions were issued by Texas Windstorm Insurance Association (TWIA), the residual market property insurer for Texas, and Citizens Property Insurance Corporation, the Florida property insurer of last resort.
• TWIA – Alamo Re Ltd. (Series 2024-1) $1.4 billion
• Citizens – Everglades Re II Ltd. (Series 2024-1) $1.1 billion
New sponsors entered the market in 2024 and in some cases expanded risk offerings available to investors. For example, the Government of Puerto Rico sponsored its first cat bond using a parametric trigger to cover named storms and earthquakes for the island. Additionally, Talanx AG, a German (re) insurance group, sponsored its first cat bond. This issuance also makes use of a parametric trigger and covers earthquake risk in Chile, Peru, Bolivia, and Argentina.
• Government of Puerto Rico – Puerto Rico Parametric Re Ltd. (Series 2024-1) $85 million
• Talanx AG – Maschpark Re Ltd. (Series 2024-1) $100 million
Cat bond loss multiples soften
Both supply and demand for capacity in the risk layers typically covered by cat bonds has grown, with supply outpacing demand in 2024, resulting in lower loss multiples. The weighted average loss multiple for 144A natural catastrophe bonds in 2024 was 3.82, down from 4.43 in 2023 but still higher than the annual level any other year during the last ten years. As in 2023, there was pronounced movement in the average loss multiple between the first and second halves of the year. The weighted average loss multiple in the second half of 2024 was 2.84, down from 4.25 in the first half of 2024. The level in the second half of 2024 is comparable to the levels in the second half of both 2020 and 2021.
Cedent demand for cat bond capacity has been high and is not expected to abate. On the supply side, capacity providers have viewed cat bonds favourably because of the strong returns, low correlation to financial markets, transparency, and liquidity. The California wildfires may slow the pace of a further year-over-year reduction in the loss multiples in the first half of 2025. Although not all cat bonds include wildfire risk, an event so large at the beginning of the year is likely to influence decisions about capital deployment. However, the cat bond layer losses seem manageable, and any upward pressure on the loss multiples from the California wildfires is likely to be countered by the redeployment of some of the billions in cat bond earnings from 2024.
Strong returns continued
The ILS market posted stellar returns yet again in 2024, with the Swiss Re Global Cat Bond Index returning 17.3% and the ILS Advisors Index, 13.1%. These returns are just slightly below the record levels achieved in 2023. Strong spread levels in 2023 and 2024 issuances have helped fuel the solid returns. Furthermore, spread tightening over the course of 2024 boosted the mark-to-market price returns of outstanding cat bonds in the secondary market. Additionally, the underlying interest rates on the collateral remain elevated compared with what they were a few years ago. In the US, favourable labor market reports and inflation persistently above the Federal Reserve’s target may slow the pace of further cuts to short-term interest rates, allowing the underlying collateral to continue to make substantial contributions to returns.
The cat bond market experienced only minimal losses in 2023 and 2024 despite huge total insured loss tallies for the (re)insurance industry overall, which ultimately made the strong returns possible. As noted, 2025 is off to a rocky beginning because of the California wildfires and the resulting mark-to-market price impacts on some outstanding bonds. The Swiss Re Global Cat Bond Index posted a return of -0.85% in January, suggesting that, although the ILS market is well positioned for another year of strong returns in 2025, returns could very well fall further from 2023 and 2024.
Growing interest in parametrics
The use of parametric triggers in 144A cat bonds is still modest at this point, with most primary insurer sponsors showing a strong preference for indemnity covers. In the broader reinsurance market, the greater availability of capacity in 2024 over 2023 meant that indemnity cover was more attainable. Nonetheless, issuance of 144A parametric cat bonds grew to $1,400 million in 2024, from $600 million in 2023.
The ILS market has seen further momentum for parametric covers. Parametric covers are likely to be used when indemnity cover is not widely available or simply doesn’t fit the needs of the cedent. Cedents have had a more difficult time placing aggregate cover for frequency-driven risks and are increasingly interested in parametrics as a solution. Parametric covers are being used to chip away at the global protection gap between economic losses and insured losses attributable to natural catastrophes. Some of that gap stems from deductibles and sub-limits on indemnity covers, and parametrics can be used to fill some of those gaps.
Government cedents are the most notable sponsors of parametric 144A cat bonds, typically through the World Bank. The government cedents especially like the speed of payout to put money to work on recovery efforts quickly. Government sponsors also make use of other forms of parametric reinsurance, such as the cover provided by regional parametric risk pools like the Caribbean Catastrophe Risk Insurance Facility or the Southeast Asia Disaster Risk Insurance Facility.
Parametric covers are perceived as being transparent, making them desirable to investors as well. Triggers may in some cases be based on modelled losses that use granular, localised data, to better align the trigger with the underlying exposure.
ILS managers remain on the lookout for ways to build out the ILS market and give investors more ways to participate in the asset class, and parametric insurance is viewed as a way to meet that objective. These covers may provide investors with access to other perils that have been more difficult to place in indemnity form. Flood and severe convective storms are two perils that have been a focus for parametric covers; business interruption is another.
Cyber ILS market build-out continues
There was additional activity during 2024 to build out the cyber ILS market. Beazley brought more risk to market in this nascent segment by issuing two more iterations of its Polestar Re bonds (Series 2024-2, 2024-3) for total of $370 million, bringing the outstanding size of the 144A cyber cat bond market to nearly $800 million at year-end 2024. Beazley also obtained $290 million of coverage via a cyber ILW.
The outstanding cyber cat bonds appear to have emerged unscathed from the CrowdStrike incident, which serves as a useful point of discussion to home in on precisely which exposures are covered and, in this case, to what extent accidental, non-malicious cyber incidents are covered. Coverage terms are still being refined to narrow the scope of coverage. To that end, clear definitions and contract wording will be crucial. With improved modeling and understanding of potential cyber loss scenarios, further deals are expected, and the cyber catastrophe bond market is expected to grow in 2025 and beyond. Fueling this growth is the demand for cyber solutions that is expected to grow as the cyber peril is of increasing concern to businesses globally.
Wai Tang is a senior director in the insurance-linked securities group at AM Best. He can be reached at wai.tang@ambest.com.
Matt Tuite is a director in the insurance-linked securities group at AM Best. He can be reached at matt.tuite@ambest.com.
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