ILS market poised for strong growth after ‘exceptional’ 2024

As for any other property catastrophe business, predictions for the insurance-linked securities (ILS) market depend on what Mother Nature does this year.

However, industry experts are largely optimistic the alternative capital markets will keep growing in 2025 and will keep offering strong returns for investors.

Although still the smaller portion of overall reinsurance capacity, the ILS sector marked another year of strong growth in 2024. Guy Carpenter and AM Best calculated third-party capital totalled $107bn in 2024, up 7% year-on-year. Swiss Re reported a 10.5% increase in catastrophe bond volumes in 2024 to nearly $47.8bn.

Although the market will continue growing, its internal distribution is likely to remain largely the same. Despite regulatory reforms designed to encourage ILS issuances in Hong Kong, Singapore and elsewhere, Bermuda will remain the primary domicile for ILS business.

Bill Dubinsky, chief executive of Gallagher Securities, says 2024 “went even better than expected”, adding: “We saw a combination of new sponsors, coupled with long absent and now returning sponsors, as well as long-time anchor sponsors all accessing capacity to balance out and optimise their reinsurance programmes.”

Highlights included the Texas Windstorm Insurance Association’s $1.4bn Alamo Re catastrophe bond, which was the largest such issuance in more than a decade.

While total returns in the market were 15.5%, down from 18.6% the year before, they were still “exceptional”, Richard Pennay, chief executive for ILS at Aon, says. “I think the general theme is very consistent with previous years, meaning the market remains in its robust state,” Pennay adds.

Jeff Mohrenweiser, senior director for insurance at Fitch, agrees, saying: “The continuation of higher-risk spreads coupled with relatively benign losses was an elixir investors in this space were more than happy to drink.”

Robust growth prospects

Will 2025 be another banner year for the ILS sector? Market participants believe growth should remain robust in 2025. “There aren’t significant headwinds that are really identifiable at this point,” Pennay says.

Henning Ludolphs, managing director for retrocession and capital markets at Hannover Re, believes another $10bn in capital could enter the market over 2025, representing an increase of about 9%, if 2025 turn out to be “an average loss year”.

“The catastrophe bond market is going from strength to strength and is on track to exceed the $50bn mark of outstanding notional in the near future,” Andy Palmer, head of ILS structuring for the Europe, the Middle East and Africa and Asia-Pacific regions at Swiss Re Capital Markets, says.

Bill Dubinsky, Gallagher Securities

“In 2025, we’ve already seen what we estimate is a record amount of catastrophe bond issuance for the month of January and, with a steady pipeline of new issuance anticipated through to the US hurricane season, the market looks to be continuing its recent rate of growth.”

According to data from Artemis, about $4bn in catastrophe bonds and other ILS instruments have been issued so far this year. These include two $500m-plus bonds for US storm risks: Integrity Re III and Gateway Re. The California Earthquake Authority has sponsored a $400m bond.

Furthermore, Artemis counts about $2bn-worth of ILS deals that have not yet been concluded. Among the re/insurance majors offering or preparing to issue ILS instruments in 2025 are Axis Capital, Swiss Re, Hannover Re, Allstate and Hiscox.

“[In 2024] we saw a combination of new sponsors, coupled with long absent and now returning sponsors, as well as long-time anchor sponsors all accessing capacity to balance out and optimise their reinsurance programmes”
_{Bill Dubinsky
Gallagher Securities}

Pennay does not foresee any major downside risks for the ILS markets, although he highlights some pressure on ILS spreads (the premiums paid by the cedants). “I think investors are obviously very much focused on spread level and the attractiveness of bonds,” Pennay says, adding demand remains strong.

Mohrenweiser adopts a more cautious tone, saying natural disaster risk is too unpredictable to provide a certain forecast. This is especially true of secondary perils and losses from these sources may be greater than those from primary perils depending on tropical cyclone activity. However, he adds the relatively conservative stance of conventional property reinsurers is pressing capital into alternative channels.

“Fitch anticipates continued strong risk spreads – albeit at lower levels reflective of the overall reinsurance pricing trends and increasing investor appetite and comfort in the asset class,” Mohrenweiser says.

Given relatively low loss activity, fewer problems with trapped collateral and other positive factors, interest in catastrophe bonds has increased in recent years, Ludolphs says.

“Investors’ interest in catastrophe bonds is very strong, which leads to more competition on pricing on new issuances,” he says.

Dynamic tension

Dubinsky says there is “dynamic tension” in the ILS market. After Hurricane Ian in 2022 caused some losses on catastrophe bonds, rates rose for a time, causing “opportunistic investors” to enter the market. Since 2023 was a relatively benign year for natural catastrophe losses, rates have fallen and these post-Ian players are pulling out, Dubinsky says.

At the same time, other money is coming in more than making up the difference,” he adds.

The recent California wildfires are unlikely to dissuade potential investors, Pennay argues. There are already natural catastrophe bonds to cover California wildfire damage, he observes, adding: “We would say investors have a propensity and a willingness to look to provide that cover [for an appropriate price].”

Mohrenweiser agrees the wildfires probably will have little impact on ILS markets, but he believes this is because investors shy away from secondary perils, for which insurers have weaker models.

Fitch cites figures from Icosa Investments that suggest “roughly 12% of the $50bn catastrophebond market is currently exposed to wildfire risk”, or around $6bn. The rating agency’s provisional loss projection for catastrophe bonds came to $250m.

California legislators may allow the state’s insurer of last resort to issue catastrophe bonds. Last month the American Property Casualty Insurance Association (APCIA) urged California policymakers to allow the insurer, the Fair Plan, to issue natural catastrophe bonds.  Only one of the planned ILS issues for 2025 so far – Allstate’s $300m Sanders Re II (Series 2025-1) – includes the wildfire peril among its covered risks, according to Artemis.

Regulatory reform

Alhough the ILS sector will grow in size, it is unlikely to change much in terms of the relative weight of various asset classes or its geographical distribution.

Catastrophe bonds, for example, will continue to take a large share of the alternative capital market, although Dubinsky says “more opaque structures” may attract more interest if returns rise. “Still, we do not think we are quite at that point yet where the catastrophe bond market share of ILS will stabilise or shrink,” he adds.

Geographically, Bermuda will, undoubtedly, remain the dominant forum for ILS issuance – as of the end of 2024, 92% of circulating catastrophe bonds could be found on the Bermuda Stock Exchange.

Other markets are making bids to draw more ILS trade and Mohrenweiser says these “will get a piece of the action if the incentives are in place, [if] investors want local regulation and the demand dictates it”.

Other ILS markets focus on business in their immediate regions: Singapore is a centre for Asian ILS issuance, while European business may domicile in London and Dublin. Some of these regional centres are adopting or considering reforms to encourage cedants to seek ILS capital in their markets.

Singapore’s central bank, the Monetary Authority of Singapore, offers grants for ILS issuance in its market, a programme that is set to run until the end of 2025. In January, MS Amlin renewed a collateralised insurance sidecar via the Singapore market.

Hong Kong passed a special law for ILS issuers in 2020, providing “simplified reporting requirements and much shorter processing time” for the legal structures that underpin ILS instruments. As of December 2024, Hong Kong had hosted six ILS offerings, most recently the $35m Silk Road Re bond offering protection against China earthquakes and US storms.

In November 2024, the UK Prudential Regulation Authority (PRA) published new proposed regulations for ILS issuers. The regulator pledged to speed up approvals of the insurance special-purpose vehicles that issue ILS instruments and lift certain regulatory requirements. A consultation on these proposals concluded on February 14.

Meanwhile. Australia is considering reforms to its capital adequacy rules that might encourage ILS take-up. At present, to count reinsurance contracts in these calculations, they must include reinstatement clauses requiring a full reinstatement after a one-in-200-year loss. ILS providers generally do not offer such clauses.

US changes

“Both London and Hong Kong have attracted business, but Bermuda has a good track record and will remain by far the largest provider of ILS-related services,” Ludolphs says. He expects regulatory changes will not touch ILS markets, even with the change of administration in the US.

Catastrophe bonds and other ILS instruments may become more prominent in major securities markets. Later this month Dallas-based Brookmont Capital plans to launch the first exchange-traded fund dealing in catastrophe bonds on the New York Stock Exchange, which could draw more retail investors to the market.

However, Mohrenweiser says ILS sponsors will probably still issue the securities via special-purpose vehicles in jurisdictions like Bermuda.

Dubinsky says some US states might be in a better position to compete for ILS business should a proposed law, the Catastrophic Risk Transfer Act pass. This bill would provide specific federal rules for the taxation of state-incorporated “catastrophic risk-transfer companies”, which Dubinsky says would include the special purpose vehicles that issue ILS.

A bipartisan group of legislators introduced this bill in the US House of Representatives in 2023, but it did not become law during the last term of Congress.

Three representatives have sponsored a second version of the bill, introduced on February 21 this year.