The second-quarter of 2014 will go down in catastrophe bond and insurance-linked security (ILS) market history as the busiest quarter ever, with a stunning $4.634 billion of new cat bond and ILS risk capital recorded in the Artemis Deal Directory.
2014 got off to a strong start with a record first-quarter seeing $1.585 billion of new cat bond and ILS transactions completed. The deal pipeline was full right from the start of Q2 2014, with new transactions ready to market and sponsors eager to tap into the very attractive issuance and pricing conditions.
That helped the second-quarter get going very quickly, with not a week passing without a new deal being in the market. Investors supported new transactions very strongly, helping almost every deal at the start of Q2 to upsize while pricing continued to follow in Q1’s footsteps, finishing at or below the initial coupon guidance.
Later in the quarter this trend for upsizing and downward pricing slowed somewhat, with the market seemingly finding price declines too steep and some perils approaching investors limits for a pricing floor. This resulted in many later transactions pricing at or above the midpoint of guidance.
A number of records have fallen in Q2 2014, testament to the continued strong interest in tapping the capital markets as a source of reinsurance protection as well as the strong interest from investors in accessing the returns offered by catastrophe reinsurance linked investments.
The first record to fall is of course the quarterly issuance total. No other single quarter in the catastrophe bond and ILS market’s history has seen a level of issuance as high as this. According to our data the $4.634 billion of cat bonds and ILS issued in Q2 beats the second highest Q2 we’ve recorded, $3.58 billion in 2007, by more than one billion dollars.
The second record seen in Q2 2014 is the issuance and completion of the biggest catastrophe bond ever. Florida’s Citizens Property Insurance Corp. sponsored its third catastrophe bond transaction and took advantage of pricing and conditions to secure the single largest cat bond cover ever, with the $1.5 billion Everglades Re Ltd. (Series 2014-1).
Of course Everglades has helped the market to break records, as you’d expect for a quarter when a deal that size is issued. However even if the Everglades Re had only been $500m in size, Q2 2014 would still have broken records for quarterly issuance.
The third record falling in Q2 2014 is the issuance figure for the first half of the year. In the first six months of 2014 Artemis has now recorded $6.219 billion of new catastrophe bond and ILS risk capital, a record for the first half of the year and in fact a record for any half-year according to our numbers.
The fourth record which tumbled in Q2 2014 was the issuance total for a single month. May 2014 saw $3.19 billion of new issuance completed, a record month in the cat bond and ILS market’s history by a long way. Everglades clearly contributed heavily to this total, but even without that large deal May was still an exceptionally strong month of cat bond issuance.
The fifth record which fell during this latest quarter, perhaps the most important and telling regarding the recent market environment, is the 12 consecutive month issuance figure which passed the $10 billion mark during Q2 2014 for the first time. Never before has the market seen so much issuance in a consecutive 12 month period. Whether this rate of issuance can be maintained remains to be seen.
Another record, the sixth, seen in the last quarter was the number of transactions which came to market. By Artemis’ reckoning 17 separate transactions were recorded in the Deal Directory during Q2, more than we’ve seen in any other single quarter. It would have been 18 had it not been for the withdrawal of Queen Street X Re Ltd.
Also, record seven we suppose, the average transaction size was the highest recorded by Artemis for a second-quarter. The average size of transactions we recorded was $273m. If we exclude cat bond lite or private deals that jumps significantly to $374m.
Issuance during Q2 was dominated by the use of the indemnity trigger, with just under 73% of the cat bonds and ILS recorded by Artemis tied to the indemnity experience of the sponsoring insurer or reinsurer. Industry loss index triggers made up the majority of the remaining deals, with just under 27% of risk capital issued. One deal, the late issued World Bank CCRIF cat bond issue, used a parametric trigger.
In terms of risks and perils seen, the quarter saw a diverse mix come to market, but still U.S. wind dominated the quarter with 68% of the risk capital issued tied to U.S. named storm or hurricane risk. However, if you factor in that all of the U.S. multi-peril cat bond issuance in Q2 also features U.S. wind to a degree then the true exposure of Q2 2014 catastrophe bond issuance to U.S. wind is nearer to 86%.
Now we come to our final record (it’s not really the last, there are more if you analyse the issuance further) from Q2’s impressive catastrophe bond and ILS issuance. The outstanding catastrophe bond and ILS market has reached new heights, with the amount of risk capital outstanding at the end of Q2 2014 hitting a record of $23.062 billion, the first time in the market’s history the total has been over $23 billion.
The risk capital outstanding of the cat bond and ILS market rose steadily through the quarter as the strong issuance helped issuance to outpace maturities very early on this year. Further growth through the rest of 2014 is almost assured, as maturities scheduled should be easy to beat for the remainder of this year.
It’s particularly impressive that the market has grown so strongly in Q2, especially when you consider that at the end of Q1, just three months earlier, we had the outstanding market sized slightly smaller than at the end of 2013. The growth since then has been impressive taking the size of the catastrophe bond and ILS market to this new high of over $23 billion. However now we are entering the typical mid-year, hurricane season related issuance lull, so it is hard to predict at this time whether it will continue.
Market conditions for issuing catastrophe bonds remain attractive however, with pricing at or near the lowest ever seen and terms and conditions increasingly attractive to sponsors. That should result in a strong issuance pipeline as we approach the later part of Q3 and into Q4.
Q4 can often be the strongest quarter of the year for issuance, as sponsors line up coverage to coincide with their January reinsurance renewals. If conditions remain so attractive for issuance we could see another record set by the end of 2014, for the highest level of catastrophe bond and ILS issuance ever recorded in a single, calendar year. Right now we are only just over $2 billion dollars of issuance away from a record for 2014.
Investor demand remains strong as well, with more capital ready to support new catastrophe bond and ILS deals. However pricing and the return of the market could become an issue if the average risk of deals issued remains low. So perhaps we will see some sponsors take advantage of investor appetite to bring some layers of risk to the cat bond market with a higher expected loss and therefore a higher return.
Every catastrophe bond and ILS deal issued in the second-quarter of 2014 and included in the Artemis Deal Directory is listed below (including privately issued deals and cat bond lites). In total Artemis recorded $4.634 billion of ILS issuance from 17 transactions, giving an average deal size of approximately $273m. That is the highest issuance volume for a second-quarter of any year in the catastrophe bond and ILS market’s history and at $6.219 billion the first-half of 2014 is also a record.
We look forward to keeping you abreast of any, and all, developments in the cat bond and ILS market as we move through the second-half of 2014.
For full details of every catastrophe bond & ILS transaction since the market began just visit the Artemis Deal Directory.
|Issuer||Cedent||Risks / Perils covered||Size||Date|
|World Bank – CCRIF 2014-1||Caribbean Catastrophe Risk Insurance Facility (CCRIF)||Caribbean hurricane and earthquake||$30m||Jun 2014|
|Market Re Ltd. (Series 2014-2)||Unknown||Florida named storms||$31.825m||Jun 2014|
|Oak Leaf Re Ltd. (Series 2014-1)||Unknown Florida based cedant||Florida named storms||$44.035m||Jun 2014|
|Alamo Re Ltd. (Series 2014-1)||Hannover Rück SE, on behalf of reinsured Texas Windstorm Insurance Association (TWIA)||Texas named storms||$400m||Jun 2014|
|Dodeka IV||?||Florida and Gulf Coast wind||$28m||Jun 2014|
|Residential Reinsurance 2014 Ltd. (Series 2014-1)||USAA||U.S. tropical cyclones, earthquakes, severe thunderstorms, winter storms, wildfire, meteorite impact, volcanic eruption||$130m||May 2014|
|Sanders Re Ltd. (Series 2014-2)||Allstate subsidiaries Castle Key Insurance and Castle Key Indemnity||Florida named storms, earthquakes, severe thunderstorms||$200m||May 2014|
|Nakama Re Ltd. (Series 2014-1)||Zenkyoren||Japan earthquake||$300m||May 2014|
|Aozora Re Ltd. (Series 2014-1)||Sompo Japan and Nipponkoa Insurance Company||Japan typhoon||$100m (JPY10.125B)||May 2014|
|Market Re Ltd. (Series 2014-1)||Unknown||Florida named storms||$10m||May 2014|
|Sanders Re Ltd. (Series 2014-1)||Allstate||U.S. named storms (excluding Florida), U.S. earthquake (CA, NY, WA)||$750m||May 2014|
|Armor Re Ltd. (Series 2014-1)||American Coastal Insurance Company||U.S. named storms (Florida only initially)||$200m||May 2014|
|Everglades Re Ltd. (Series 2014-1)||Citizens Property Insurance||Florida hurricanes||$1.5b||May 2014|
|Citrus Re Ltd. (Series 2014-2)||Heritage Property and Casualty Insurance Co.||U.S. named storms (Florida only initially)||$50m||Apr 2014|
|Kilimanjaro Re Ltd. (Series 2014-1)||Everest Reinsurance Company||U.S. named storms, U.S. earthquakes||$450m||Apr 2014|
|Lion I Re Ltd.||Assicurazioni Generali S.p.A.||European windstorm||€190m||Apr 2014|
|Citrus Re Ltd. (Series 2014-1)||Heritage Property and Casualty Insurance Co.||U.S. named storms (Florida only initially)||$150m||Apr 2014|
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