January 27, 2016 by Canadian Underwriter
Although 144A property and casualty (P&C) cat bond primary issuance levels were charted as “uncharacteristically low” in the fourth quarter of 2015, totals at year-end were only slightly lower than the all-time high levels seen in 2014, according to GC Securities.
On Wednesday, GC Securities, a division of MMC Securities LLC, a United States registered broker-dealer, released a briefing of cat bond activity for Q4 2015 and a full-year analysis of 2015. The results showed that 2015 issuance totalled US$5.917 billion and outstanding risk capital totalled US$22.640 billion as of Dec. 31, 2015, Guy Carpenter & Company, a provider of risk and reinsurance intermediary services, said in a statement. The risk capital outstanding as of year-end 2015 – US$22.640 billion – was 0.56% lower than 2014’s all-time high in the 144A P&C cat bond market. [click image below to enlarge]
2015, which began with record issuance levels in the first quarter, experienced a dramatically different fourth quarter, marking the second biggest dip in the market since 2005, according to the briefing, titled Catastrophe Bond Update: Fourth Quarter and Full Year 2015. The relatively low issuance levels of completed 144A P&C cat bonds benefitted five sponsors and totaled US$1.425 billion, the statement said.
“Overall, 2015 proved to be a strong issuance year for the cat bond market,” said Cory Anger, global head of ILS structuring with GC Securities, in the statement. “The relatively low levels of activity we saw at year-end may be due to the fact that sponsors, who might ordinarily issue in the fourth quarter, had the flexibility to delay issuance to Q1 2016 in an effort to either obtain better execution, or to avoid transaction crowding,” Anger suggested, adding that he views this “shift in sponsors’ willingness to prioritize execution over specific renewal dates as a further sign of the maturity of the insurance-linked securities space.”
Despite a somewhat limited amount of capital placed, one new sponsor and four repeat sponsors accessed the 144A cat bond market during the fourth quarter, GC Securities reported. The new sponsor, Amtrak’s captive Passenger Railroad Insurance Ltd., marked the most significant transaction with successful placement of US$275 million of principal at-risk variable rate notes issued from the newly formed PennUnion Re Ltd. The Series 2015-1 notes provide per occurrence, parametric triggered protection from storm surge and wind resulting from named storms as well as earthquakes affecting the northeast region of the United States.
Pricing dynamics in the fourth quarter were also mixed, GC Securities said, with bonds trading in different directions based on the risk level, peril exposure and relative market size. As was the case throughout 2015, and particularly in the second half of the year, this time period was marked by continuing rate compression as well as the trend of sponsors and investors rotating their investment portfolios toward higher risk, higher return positions.
In 2016, absent a major market disruption, risk spreads in the 144A P&C and private cat bond market will remain “flat to slightly down,” Anger predicted. Especially as new sponsors continue to incorporate alternative capital into their strategies, issuance is expected to be “similar to the last several years, with further growth in the private cat bond market.”