September 30, 2015 by Canadian Underwriter
The Q3 2015 catastrophe bond market has seen an “interesting mix of activity, though light,” totalling nearly US$700 million in issuance, including the cat bond lite space, Property Claim Services (PCS) said in a report released on Wednesday.
PCS, a Verisk Analytics business, noted that the third quarter has been quiet for the past couple of years. Following strong issuance activity in the third quarters of 2012 and 2013, issuance of property catastrophe bonds fell to zero last year.
This year, outside of the “lite” market, sponsors completed three relatively small transactions for US$600 million in new limit, bringing the year-to-date total to US$4.7 billion, said Dog Days of Summer: PCS Q3 2015 Catastrophe Bond Report.
The report said that with deals covering Turkey and China last quarter, “it’s easy to see how the insurance-linked securities (ILS) market is adapting to the broadening needs of cedents and capital provid¬ers around the world.” And in the cat bond lite space, nearly US$100 million in third-quarter issuance brings the annual total to almost US$700 million in publicly revealed activity – more than twice the full-year 2014 result.
According to data from the Artemis.bm Deal Directory, insurers and reinsurers issued about US$4.5 billion in cat bonds in the first nine months of 2015, down 20% from the same period last year, not including cat bond lite transactions, private catastrophe bonds, or transactions focused on lines other than property catastrophe (such as medical benefits and workers compensation).
“The slight improvement from the first half’s year-over-year decline of 28% comes from the fact that three small transactions were closed in July 2015, while none were completed in the third quarter last year,” the report said.
Despite the decline in capital raised, issuance frequency is up slightly from the first nine months of 2014. Sponsors completed 20 transactions in the first nine months of 2015, up 11% year over year, with the number of deals exposed to North American risks up from 14 to 16. North American issuance for the first nine months of 2015 was US$4.1 billion, compared to US$4.8 billion for the first nine months of 2014.
While the traditional catastrophe bond market was fairly quiet in the third quarter, the cat bond lite market continued to push forward, PCS noted. Four transactions led to approximately US$94 million in new limits. The flurry of July activity has brought the year-to-date publicly revealed total to US$490 million across 16 transactions. That’s twice the full-year 2014 total. By comparison, in all of 2014, ten publicly revealed cat bond lite transactions resulted in US$242 million in risk transfer.
“The continued growth of cat bond lite adoption indicates that the market has seen the value of securitization for private transactions in conjunction with a streamlined issuance process,” PCS said in the report. “And the structure, rigor, and discipline involved in issuing through a cat bond lite platform may give this form of issuance an edge over private catastrophe bonds.”
The use of the cat bond market by publicly managed entities has gained even more momentum, the report said. Year to date, U.S. publicly managed entities have raised US$1.9 billion through the catastrophe bond market. The number of transactions completed doubled from last year’s total of three (one of which came in the fourth quarter).
PCS noted that their team reviews 40 to 50 events in North America every year that have the potential to become catastrophes (generate an industry insured loss of at least US$25 million). Every year, the PCS team reviews 40 to 50 events in North America that have the potential to become catastrophes. Last year, the team designated 37 catastrophes. So far in 2015, the team has designated 31 North American catastrophe events, all winter storms in the United States.
The report also identified “five key themes of strategic importance” for the Jan. 1, 2016 reinsurance renewal season, which has already begun. PCS sees the following “to do” list for the next three months:
• Keep it “lite”: The rapid growth of cat bond lite is poised to continue, PCS suggested. In addition to the record-breaking activity this year, there’s plenty of interest from potential new entrants, and the involvement of traditional reinsurers in the cat bond lite market this year suggests that 2016 could be bigger than 2015. So far, the use of cat bond lite has been complementary to the broader catastrophe bond market, a trend that’s likely to continue;
• Break through borders: ILS activity is gaining more traction outside “traditional mar¬ket sweet spots.” This year (including lites), China, Japan, Turkey, Canada and Europe have featured in catastrophe bond issuance activity;
• Serve the public interest: Publicly managed entities seem like a growth market for the ILS space, with the six transactions from this sector representing a third of year-to-date catastrophe bond issuance. Finding new sponsors in this segment will be crucial for ILS growth — both for the publicly managed entity market and the catastrophe bond space as a whole;
• Evaluate alternatives for new entrants: Despite significant growth over the past decade — and even in recent years — the catastrophe bond market seems to be attracting fewer first-time cedents than in the past. Collateralized reinsurance and cat bond lite are broad-ening the base of cedents in this environment, but helping cedents understand the advan-tages of different types of structures could attract the new risk that the ILS market needs to sustain rapid growth, the report said; and
• Choose the right alternative: Cedents now have many ways to access capital markets capacity, each approach having unique features that can address a specific company’s needs. As a result, it appears overall ILS market growth will not depend on the increased use of catastrophe bonds, particularly since cedents can balance the rigour of those trans-actions with faster and less expensive approaches, such as ILWs and cat bond lite. The ILS market, with the range of solutions it provides, is showing a growth trajectory that’s built to last, the report concluded.