By Michael Loney

April 1 - (The Insurer) - Catastrophe bond issuance in the first quarter was by far the biggest Q1 on record, potentially setting the market up for a record year, while sidecar capacity has also grown, reinsurance brokers have said.

• Aon: Q1 ILS issuance expected to exceed $6.2 billion, 61% higher than Q1 2024

• Sponsors came to market earlier to avoid the bottleneck of issuances in previous years

• Gallagher Re: ILS market set up for “potentially record-setting year of issuance” in 2025

• Sidecar capacity has also grown through new entrants and expanded existing offerings

Discussing the insurance-linked securities $(ILS)$ market in its Reinsurance Market Dynamics report on the April renewals, Aon said the cat bond market size is approximately $50 billion, having surpassed the milestone in March.

The impact of January’s California wildfires to the cat bond market has been limited so far, with Aon’s weekly pricing estimating the impact to the 144A market at roughly $600 million of mark-to-market loss, or 1.2% of the outstanding market.

“The constrained impact from this event reinforces that the cat bond market is underweight in California wildfire exposure as a standalone peril, driven by a lack of transactions over the past several years,” the Aon report said.

However, the broker continued that the sidecar market will be affected by the wildfires because these contracts are typically structured as a pro-rata share of non-proportional reinsurance portfolios. The report said “it’s reasonable to assume a negative return during the first quarter of 2025” for the sidecar market.

Despite the wildfires, Aon Securities estimates that new issuance cat bond volume for Q1 2025 will exceed $6.2 billion. This is by far the largest first quarter on record, 61% larger than the previous record first quarter of $3.9 billion in Q1 2024.

“While the growth is impressive and speaks to the robustness of the current market, it’s worth noting that most of this growth is from existing participants in the cat bond market who moved historical second quarter deals to the first quarter,” Aon’s report said.

In its 1st View report on the April renewals, rival reinsurance broker Gallagher Re said that the “huge uptick” in ILS issuance in Q1 happened “as many sponsors came to market earlier to avoid the bottleneck of issuances that has occurred in recent years.”

“As a result, the market is setting up 2025 to be a potentially record-setting year of issuance,” the report said.

Gallagher Re said that $4.97 billion of non-life underwritten Rule 144A cat bonds had been issued as of March 21, up 94% year on year.

“Strong demand from sponsors and ample cash from investors resulted in deal upsizes and spread reductions,” the report said.

Gallagher Re said deals have been upsizing anywhere from 20% to 120%, with a weighted average upsize so far this year of 70%. This compares with deals in Q1 2024 upsizing between 5% and 150% with a weighted average of 35%.

Spreads have tightened between -5% and -25% compared to -5% and -30% in last year’s Q1.

“In general, cat bond risk spreads have remained flat since the previous quarter, with the exception being U.S. earthquake deals where spreads have decreased because of strong investor demand,” the report said.

Non-life ILS assets under management are up around 7% in 2025, which Gallagher Re said is driven by another strong year of performance and a favorable fundraising environment.

Gallagher Re’s report also said that the weighted average discount margin in the non-life cat bond market as of the end of 2024 was 6.5% with a weighted average expected loss of 2.1%. This corresponds to a nonseasonally adjusted market multiple of 3.09.

As of March 21, 2025, the weighted discount market was 6.6% with a weighted expected loss of 2.21%, corresponding to a nonseasonally adjusted market multiple of 2.98.

A RACE FOR INDEMNITY ILS CAPACITY

Aon’s report said issuance this year began with several industry loss triggered cat bonds. This included several remote layers issued by QBE, Inigo, Hannover Re and Hiscox, offset by riskier offerings from Hannover Re and Swiss Re.

A total of $1.175 billion of industry loss triggered cat bonds were issued in the first quarter of 2025, Aon said.

The broker added that “a race for capacity” in indemnity issuance included Heritage, Tower Hill, American Integrity, SURE, Security First and Kin all bringing deals that closed by mid-March for risk periods beginning in June or later.

“Coming to market early for these buyers paid off: out of six transactions, five upsized (with an average upsize/ class of notes of over $30 million), and all had tranches for which price guidance tightened from initial guidance,” Aon said.

In addition, Allstate’s $750 million transaction in Q1 was placed well in advance of when the insurer has traditionally issued transactions in Q2, to achieve favorable pricing at a time when investors were flush with excess capital.

“Several transactions remain in the market at the time of this writing, many of which are anticipated to close before quarter end, further inflating a record quarter for issuance,” Aon’s report said.

STRONG FUTURE EXPECTED FOR SIDECARS

The reports from Aon and Gallagher Re also highlighted that sidecar capacity has grown.

“New entrants to this market—many of whom are well-regarded underwriters—have developed new platforms, creating exciting opportunities for investors,” Aon’s report said. “Further, existing sidecar offerings (e.g., Everest’s Mt. Logan) continued to expand from reinvigorated marketing efforts and strong returns over the past two years.”

The sidecar market has also expanded beyond natural catastrophe risk to long-tail casualty opportunities.

Gallagher Re said that sidecars have gained in popularity, with nearly a 50% increase in issuance year over year.

“Cedants are increasingly forming partnerships with investors through sidecars and related vehicles, driven by investor demand for access to premium flows from insurance risks. This interest is now extending beyond traditional property catastrophe risks to include casualty and other non-cat ILS risks and using innovative structures, signaling a strong future for the sidecar market,” the report said.

Aon said that the robust cat bond growth and increase in sidecar capital has pushed alternative capital to nearly $115 billion at the end of 2024, up $7 billion during the year.