Quarterly cat bond update shows positive trend forming

The expanding investor base and competitive capacity of the catastrophe risk market signals a positive trend for the long term, suggests G.C. Securities’ analysis of first quarter activity and trends within the risk market for 2013.

“The catastrophe risk market is demonstrating its readiness to transition from ‘adolescence’ to ‘young adulthood,’” Chi Hum, global head of distribution for insurance-linked securities (ILS) at G.C. Securities, a division of MMC Securities Corp., notes in a statement from Guy Carpenter & Company, LLC, which provides risk and reinsurance intermediary services.

“We are seeing that conservative institutional asset managers have largely accepted catastrophe risk as a component of a mainstream investment strategy,” Hum reports.

“The broadening investor base is certainly a positive trend for the long term, as it increases the level of available capacity without leaving the market susceptible to reckless capital. Looking forward to the balance of 2013, capacity from the alternative markets has never been more competitive.”

The analysis, Catastrophe Bond Update: First Quarter 2013, was released Wednesday. Two natural peril-exposed catastrophe bond transactions closed during the first quarter of 2013, for a total of US$520 million of issuance, notes the statement. During the quarter, US$520 million of issuance was offset by US$352.5 million of maturities, driving an increase of risk capital outstanding of US$167.5 million.

“When looking to the remainder of 2013, G.C. Securities expects the market to approach, if not exceed, the record for annual issuance of US$7.0 billion set in 2007,” the statement adds. This forecast will depend on cat bond market pricing remaining stable and non-U.S. peak peril sponsors taking advantage of particularly attractive conditions to bring sizeable issuances to the market during the balance of 2013.

“Although the low interest rate environment has made the catastrophe market more attractive to institutional capital, it is not the primary driver of inflows,” Cory Anger, global head of ILS structuring at G.C. Securities, notes in the statement.

“Rather, we are seeing significant demands in part because of the ‘decoupling’ of pricing between the traditional reinsurance and capital markets,” Anger says, noting that the cat bond market may be able to offer capacity in peak risk zones at a lower price point because it does not have the same capital costs.