Investor demand for catastrophe bonds to remain strong in 2014: Fitch

by Artemis on December 27, 2013

After a bumper 2013 of issuance in the catastrophe bond market, with the volume issued reaching the second highest level ever recorded, investor demand for cat bonds is expected to remain strong in 2014, according to Fitch Ratings.

2013 has been a great year for the sponsors in the cat bond market. Growing investor demand has helped sponsors to offer deals at considerably lower coupon rates, effectively cheapening the cost of deals, while the structures and the cover provided have continued to evolve to better suit sponsors coverage needs, said Fitch.

Sponsors have been able to secure more and broader protection at increasingly better costs as we moved through 2013 and judging by the way pricing has reduced and volumes have increased on recent cat bond transactions covered here on Artemis, this trend looks set to continue into 2014 as well.

Even though transactions have increasingly favoured the sponsor, said Fitch, continued strong demand for a diversifying set of risks from investors has continued to drive the cat bond market.

2013 has seen near record issuance, now standing at an impressive $7.2 billion (with the completion of Queen City Re and the issuance of Windmill I Re) and with another $422m still to come (from still to complete Loma Re (Bermuda) and VenTerra Re 2013-1).

This has taken the size of the outstanding catastrophe bond market to over $20 billion for the first time in its approximately 16 year history, a real milestone for the market and something that has been driven by both strong investor demand and the innovation within cat bond issuance which has helped to match the coverage offered to sponsors reinsurance protection needs.

Fitch Ratings said that it expects strong investor demand for cat bonds will continue to be strong in 2014, in particular for geographically diversifying perils. Current market conditions are likely to drive further issuance of cat bonds as well, as long as re/insurers believe they can offer a cost-effective alternative to traditional reinsurance and retrocession.

Fitch notes that the cat bond market remains predominantly exposed to U.S. wind risks, with the market approximately 72% consisted of U.S. wind, compared to only 45% back in 2003. However, 2013 has seen a good deal of diversifying issuance, notes Fitch, with U.S. and Canada earthquakes, Turkey earthquake, Australia cyclones and U.S. thunderstorms and winter storms also on offer.

Non-U.S. risks, which offer the greatest level of diversification to ILS investors, remain highly sought after, said Fitch. 2013 saw $2.8 billion of new cat bond issuance featuring triggers for perils outside of the U.S. market which represented around 40% of issuance at the point its article was written, noted Fitch. This was a slight increase in diversification offerings over previous years.

In terms of sponsors, Fitch counted 30 different sponsors of cat bonds during the year, with 11 first-time sponsors of cat bonds. There was also a show of confidence in the market from three long-time sponsors of cat bonds, American International Group, Nationwide Mutual and USAA, each of which came to market as sponsors twice each during the year, noted Fitch.

Put all of these factors together and the outlook does look bright for 2014 catastrophe bond issuance. The proof will of course be in the forward pipeline of deals which is expected to come to life once we enter the new year.

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