Yesterday we covered the release of reinsurance broker Aon Benfield’s latest reinsurance renewals report. The report contains insight and comments on the alternative capital inflows and pricing trends being seen in the insurance-linked securities market versus traditional reinsurance renewals. The report also contains a review of the Q1 2013 catastrophe bond market, looking at issuance, trends and forecasting strong issuance in the months ahead.
Aon Benfield said that issuance started slowly in 2013, perhaps surprising given the strong end to 2012 and the strong Q1 a year earlier, however the cat bond market picked up around the middle of the quarter as a number of deals from repeat sponsors led the way. Aon Benfield note that all of the transactions which priced in the first quarter of 2013 were indemnity deals for repeat sponsors, although readers will be aware that we include a private transaction, Skyline Re Ltd., in our Deal Directory which was from a new entrant to the market.
Investors had a good range of risks to choose from in the deals which came to market in Q1. Only three deals actually closed in Q1, by Aon Benfield’s reckoning although we count four including Skyline, but a number of others began marketing in Q1 helping to offer investors more choice. The perils on offer ranged from health care risks, to regional earthquake, U.S. multi-peril and Florida hurricane.
So, for Q1 issuance, Aon Benfield class 3 deals as having completed in the quarter, Vitality Re IV Ltd. (Series 2013-1), Caelus Re 2013 Ltd. (Series 2013-1) and Everglades Re Ltd. (Series 2013-1) , totalling $670m. We also include the Skyline Re Ltd. (Series 2013-1) bond in our Deal Directory which takes the total to $731.2m. That’s down on the total issued in Q1 2012, in fact it’s roughly half the $1.493 billion of cat bonds we recorded a year earlier.
However, despite the slower start to the year things have now picked up in the primary cat bond market with a number of deals which began marketing in Q1, some of which have already closed in April. Including those yet to close we currently see $1.22 billion in the Q2 2013 cat bond market already, and Aon Benfield believe that is likely to grow, forecasting strong issuance in the run up to the U.S. hurricane season.
The report comments on the drop in pricing that began to become evident in Q1. Aon Benfield said that they estimate a downward shift in interest spreads of between 10% and 20% since the fourth quarter of 2012. The report also mentioned an up to 70% risk adjusted reduction (likely year-on-year) in pricing for certain sponsors seeking capacity in the ILS markets at the renewals as we wrote in this earlier article on the report.
Aon Benfield said that the reduction in pricing seen of late has helped to cement the value of the cat bond market for sponsors, with cat bonds consistently offering more aggressive rates than traditional reinsurers.
The report goes on to discuss some of the deals which have appeared most successful so far this year, highlighting Citizens Everglades Re and the pricing it secured, the twin Caelus Re issuances from Nationwide Mutual as it sought to take advantage of attractive market conditions and State Farm’s Merna Re IV which was significantly oversubscribed. Aon Benfield note that Merna Re IV’s pricing at an interest spread of just 2.5% is the lowest pricing level seen in the cat bond market for five years.
Looking ahead, Aon Benfield expect a reasonably healthy pipeline of deals will continue to come to market as we move towards the middle of the year. It expects strong issuance volumes to continue as we move towards the start of the Atlantic hurricane season and forecasts that around $4 billion worth of cat bonds could close in the first-half of 2013.
We asked Paul Schultz, CEO of Aon Benfield Securities, for his thoughts on the state of the catastrophe bond market so far in 2013. He commented; “The ILS market in 2013 is building on momentum established over the past few years. We are seeing continued interest by long time sponsors as well as new sponsors entering the market. One of the founding principles of the ILS market was that large scale and efficiencies offered by the capital markets would benefit sponsors via attractively priced capital options and we are currently seeing that across the market and across return periods. Capital inflows continue to be influenced by the current yield environment and will further assist in driving growth throughout year.”
If the catastrophe bond market can achieve $4 billion of issuance in the first-half of 2013 it will put the market ahead year-on-year with 2012. The sluggish start to 2013 led many to suggest that we may not see a repeat of the ‘banner year’ that many have dubbed 2012, but if the market lives up to the Aon Benfield forecast then we could just see another banner year in quick succession.
As ever we’ll keep you posted as and when we hear that new cat bonds have come to market and you can read about every transaction in the markets history in our Deal Directory.
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