A record cat bond issuance is expected in the year ahead, according to credit rating agency AM Best.

The company’s managing director, Ratings Services Insurance-Linked Securities Group, Emmanuel Modu, expects the existing record of about $15 billion to fall this year.

He was speaking during a segment about the ILS market on AM Best TV.

He said the market has already seen cat bond issuance in the first quarter of 2024 reach a record $3.9 billion. The second quarter of this year is expected to more than double that, with $7.7 billion.

Mr Modu also commented: “The first half of 2024, we expect $11.6 billion in issuance. By year end, we believe we will pass the cat bond record of $15 billion.”

However, it depends on what happens in the upcoming hurricane season.

Mr Modu also noted that ILS capacity was at $100 billion at the beginning of the year, representing about 18 per cent total global reinsurance capital.

“Capacity has not grown much since 2018 when it was at $95 billion,” he said. “Between 2018 and 2023 it grew at a paltry 1 per cent per year.”

He did not expect strong growth in total capacity in 2024, but said the cat bonds segment would continue to climb, perhaps growing by 15 to 20 per cent.

“It might take another year for ILS markets to resume more robust growth rates of about 4 to 8 per cent,” he stated.

The great ILS returns last year were partly due to Mother Nature, Mr Modu said.

“The most severe event last year was the Turkey/Syria earthquake which tragically killed about 50,000 people,” he said. “That was only a $6 billion event, according to Swiss Re. This is much lower than the $56 billion single event loss in 2022, and the $41 billion loss in 2021.”

He said investors have already factored in the relatively mild cat year in 2023 when considering how they will deploy funds this year, but are waiting to see what happens.

“Interest in cat bonds remains high because investors like that cat bonds generally attach at a much higher level than collateralised insurance,” he said. “They also remain the most liquid section of the ILS market.”

There have been eight new issuers, so far this year, compared to 11 in 2023 and Mr Modu expects more in the future.

He also commented: “Last year, there was a flurry of cyber bonds issued totalling $415 million. This year, there has been only one tiny private placement of a $14 million cyber bond by Hannover Re which covered cloud outages for the first time.”

A cloud outage happens when cloud computing applications, and services hosted on the cloud, are unavailable.

There was also a cyber bond issued by Beazley, in London, of $160 million.

Mr Modu said the ILS market likes cyber-risk because it is generally short-tail in nature. Short-tailed claims are usually settled within a year.

He explained: “They are not correlated with the financial markets, except for the extreme tail.”