Aon: Cat bond market tops $45.6bn following “record-breaking” 76 transactions

Record catastrophe bond issuance of $17.9bn in the 12 month period ending 30 June 2024 has accelerated the total size of the market to $45.6bn, according to a new report by Aon Securities.

Aon’s annual ILS report detailed “a year of record-breaking ILS activity”, including the issuance of $17.9bn of cat bonds across 76 transactions by 64 issuing entities, including repeat sponsors and new issuers.

With the total cat bond market now standing at $45.6bn, this marks a 17.9 percent increase from the prior-year result.

The report noted that with almost $11bn of maturities over the same 12 months, the market required over $6.9bn of growth to sustain the issuance volume over this period. Quarterly issuance outpaced maturities in three of the past four quarters.

“With outstanding cat bond capacity exceeding $45bn, we can anticipate a more broadly diversified cat bond market that is here to stay, particularly [regarding] the extent [to which] investors seek to reward diversifying risk,” said the report.

Cat bond activity fuelled the growth of the broader ILS market, which reached a total volume of $110bn.

In general, additional capital seeking wider risk margins was met with “unprecedented” demand for ILS capacity from insurers, reinsurers, corporates and governments in light of sustained higher pricing across the traditional (re)insurance markets.

The sector has benefitted from capital inflows since early 2023 following the landfall of Hurricane Ian in September 2022, as investors continued to benefit from the diversification merits of the asset class, and ultimately achieved record returns in 2023.

Growth in the sidecar market was facilitated by the return of past ILS investors attracted by heightened returns, with new issuance and strong returns combined driving sidecar volume to a new estimated record of $10.0bn over the 12 months.

This marks a 40 percent increase compared to $7.1bn during the prior-year period, and surpassed the previous peak of outstanding volume of $8.4bn in 2015.

Richard Pennay, CEO for ILS at Aon, commented: “The past 12 months can be characterised as a year of records, and the growth of the ILS market comes at a time when risk transfer needs are at their greatest. Inflation, evolving weather trends and ambitious moves to close the protection gap have all driven demands for greater insurance and reinsurance capacity.”

“New frontier” of cyber risk

A stand-out trend in the 12-month period was the introduction of cyber risk to the ILS sector. Aon Securities brought to market the first-ever 144A cyber cat bond on behalf of Axis Capital with Long Walk Reinsurance Ltd in November 2023.

According to the report, Long Walk attracted broad interest from ILS investors, pricing below the announcement guidance at 9.75 percent and closing at $75mn in size.

A further four 144A cyber cat bonds were brought to market, totalling $575mn. Aon said this highlights cedants’ desire to develop alternative sources of capital for cyber risk, as well as ILS investors’ appetite to gain access to a peril which is diversifying to existing concentrations of natural catastrophe risk.

While still a relatively small footprint in comparison to the limit exposed to nat cat events, the five transactions across four issuers undoubtedly lay the foundation and framework from which to increase the level of cyber risk ceded to the ILS market going forward.

“The introduction of cyber risk to cat bond investors for the first time ever was a groundbreaking step forward for risk buyers and seekers, alike,” Pennay concluded.

“This new frontier lays the foundation for further growth in the ILS market, driven by a peril anticipated to be of increasing concern to businesses globally for years to come.”