Cat bond market reports $10bn in new inflows
As the volume and intensity of natural disasters increases, so too does investor demand for catastrophe bonds, new data shows
The global market for catastrophe bonds, fixed income securities that transfer catastrophe risk from insurers and reinsurers to capital market investors, has increased significantly, according to Morningstar's latest Catastrophe Bond Fund Landscape report.
Over the past three years, the global cat bond market has grown by around 37% to $37.7bn in assets under management, following $10.2bn in net new inflows, Morningstar data shows.
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Growing investor appetite comes as the period between 2015 and 2024 has officially become the warmest decade on record, according to the World Meteorological Organization.
The global cat bond market is highly concentrated among a handful of providers, and two of the three largest funds are currently closed to new investors, highlighting capacity constraints within the asset class, Morningstar said. Overall, the ten largest managers cover some 75% of the overall market with Twelve Capital, Stone Ridge, Schroders, Fermat, and GAM dominating the cat bond field to date.
Cat bond coupons typically comprise a floating reference rate, such as the three-month US Treasury bill yield, plus a risk premium. While the risk premium is intended to compensate investors for taking on catastrophe risk, Morningstar noted that yields can exceed expected losses by a significant margin.
Since 1997, average coupons have exceeded 6%, while average expected losses have been around 4%, the report found.
However, if a specified event does occur, investors could lose a significant portion of their principal investment.
Insurers are increasingly relying on cat bonds to transfer the risks associated with natural disasters such as hurricanes, earthquakes and wildfires. Mara Dobrescu, senior principal, manager research at Morningstar, said that despite the mounting challenges, cat bonds have outperformed broad global bond markets.
"Recent events also highlight the role these products play within the insurance ecosystem. The increase in losses from severe weather events and natural disasters globally has reinforced the need for alternative sources of risk capital and demonstrated how catastrophe bonds can help insurers and reinsurers manage large-scale losses.
"However, capacity constraints are increasingly visible, with some of the largest funds now closed to new investors, while fees remain significantly higher than those of traditional bond funds. Manager expertise, portfolio diversification and liquidity are also critical considerations when evaluating catastrophe bond strategies," she added.
