Catastrophe bond issuance in 2015 ‘will modestly exceed’ last year

Investors put more than US$8 billion into catastrophe bonds last year, and assets under management in insurance-linked security should continue to grow, Willis Securities Inc. stated in a report released Thursday.

“We would not be surprised to see $9 billion of issuance in 2015,” Willis Capital Markets & Advisory, the brand used by Willis Securities, reported. All figures are in United States dollars.

Catastrophe bond issuance was $8.026 billion in 2014, Willis stated, noting $4.491 billion was issued in the second quarter.

“Absent a major market moving event (e.g., a $100B+ U.S. catastrophe event), we expect that spreads will decline and (assets under management) will grow,” Willis stated in the report.

“Nonetheless, a second trend we anticipate is that the rates of decline and growth respectively will fall off. Some investors will reach for yield and accept more risk. Other investors may lean towards more transparent risk transfer with more modest expected returns that can be underwritten with less expensive underwriting (e.g., a beta investment approach). Investors are a varied lot. Putting all of this together, we expect that 2015 cat bond issuance will modestly exceed 2014 numbers.”

Cat bond issuance totaled $2.1 billion in the fourth quarter of 2014, including $500 million by Everest Re, covering earthquakes in the U.S. and Canada.

“The single tranche added to Everest’s $450 million April issuance, bringing the sponsor’s total cat bond coverage secured in 2014 to almost a billion dollars,” stated Willis Capital Markets & Advisory, which is owned by London-based Willis Group Holdings plc.

Other issuances in Q4 2014 included: $400 million by California Earthquake Authority; $100 million by United States Automobile Association (USAA) covering “a range of risks in the U.S. including tropical cyclones, earthquakes (with fire following),” severe thunderstorms, winter storms, volcanic eruption and meteorite impact; $200 by Amlin “covering losses resulting from named storms and earthquakes in the U.S.” and windstorm in Europe; $500 million from American International Group Inc. covering named storms and earthquake for the U.S., Canada, Mexico and most of the Caribbean; and $375 million by Zenkyoren, covering Japanese earthquake.

Reinsurers represented less than 20% of total issuance, Willis noted.

“Had it not been for Everest Re and its $950 million of Kilimanjaro bonds, 2014 (re)insurers’ share of total issuance would have dipped below 10%,” according to the report. “Our calculations suggest a marked decrease from prior years, when (re)insurers constituted almost 50% of total sponsors.”