By Henry Gale

June 24 - (The Insurer) - Catastrophe bonds are playing a bigger role in some carriers' reinsurance programs as investor appetite means pricing can be more favourable than traditional coverage.

Two years of strong returns for ILS funds and volatility in other asset classes have driven inflows of capital to the cat bond market, which has pushed down pricing.

Cat bond issuance has hit record levels in the first half of 2025 as cedants have upsized their coverage and others have issued bonds for the first time.

"We've seen quite a substantial rate decline," said Dirk Schmelzer, managing partner and senior portfolio manager at Plenum Investments. "More or less at long-term average risk spreads in the market. But definitely, this high spread environment is behind us."

ILS investors "are willing to price cat protection competitively in comparison to traditional reinsurance", said Shiv Kumar, president of GC Securities.

Twelve Securis' chief investment officer for liquid strategies Etienne Schwartz agreed that cat bond premiums are currently "slightly lower" than traditional reinsurance. "That is one of the main elements why some sponsors decide to go for the cat bond coverage (and) upsize those tranches," he added.

Recent cat bond issuances have tended to be repriced downwards from their initial pricing range, Schmelzer said.

"When I hear that many cat bonds were placed directly parallel with the traditional (reinsurance) programs, and then we saw the cat bonds grow beyond their initial size and guidance, I think there's maybe also a little bit of a shift from a competitive perspective," he added.

Several cedants whose previous cat bond coverage was maturing increased the size of their coverage when they came to the cat bond market this year.

One example is Palomar Holdings, which secured a $525 million earthquake cat bond last month alongside its earthquake reinsurance program, up from a targeted $425 million in coverage. Its previous maturing bond provided just $275 million of cover.

Palomar's total ILS capacity was $875 million in June 2023, $895 million in 2024 and $1.15 billion as of this year's renewals – a third of its total earthquake limit. The company also noted in a recent announcement that it secured the cat bond coverage at the lower end of its pricing range.

The first half of the year has also seen some of the largest single cat bond transactions. "We saw two different bonds exceed $1.5 billion size this quarter which is quite remarkable," Kumar said, suggesting this was also part of the trend of transactions growing in size.

Companies that are upsizing their cat bond limits are "seeing value in the cat bond market relative to their traditional reinsurance and retrocession alternatives", said Richard Pennay, CEO of Aon Securities.

"And that really speaks to not just pricing, but the collateralisation of the limit and the multiyear terms."

Others have come to the market for the first time, such as Florida carriers Centauri and Lilypad's joint issuance. Kumar said 10 new cedants had issued their first ever cat bond so far this year, while 12 had entered the market last year. "Most of them are likely to be repeat issuers in the future," he said.