Ongoing maturation of cat bond market, highlighted in PCS report

2014 was a year full of firsts for the catastrophe bond market, helping cat bond issuance to reach a new record highs. But as well as breaking new ground the cat bond market shows signs of continuing maturation, according to the latest market report from Property Claim Services (PCS).

Breaking records is becoming more normal for the catastrophe bond market, after the strong issuance of 2013 has now been followed by another year when a number of records have been broken in 2014, PCS notes. But while this could be mistaken for a market still in its infancy, PCS says that it actually “looks more like rapid adoption of a proven concept.”

In PCS’ latest catastrophe bond market report, titled “Not (Just) a Big Deal: PCS® Full-Year 2014 Catastrophe Bond Report“, it highlights that insurance and reinsurance firms are increasingly accepting the viability of catastrophe bonds as risk transfer and capital management tools.

The number of potential cat bond sponsors is growing as interest in insurance-linked securities (ILS) grows, but that’s just one of the developments that makes the cat bond markets continued success transformational. PCS highlights other developments from 2014’s issuance that demonstrate a market in the midst of ongoing development and maturation.

Firsts and notable facts seen in 2014’s catastrophe bond issuance, according to PCS with links to further information on each from Artemis where available, include:

• The first year with five catastrophe bonds of $450 million or more
  Kilimanjaro Re Ltd. (Series 2014-1), Everglades Re Ltd. (Series 2014-1), Sanders Re Ltd. (Series 2014-1), Kilimanjaro Re Ltd. (Series 2014-2) and Tradewynd Re Ltd. (Series 2014-1).
• The first European indemnity-triggered catastrophe bond
  Lion I Re Ltd.
• The first year cat bond lite truly gained traction, with more than $200 million in new limits issued across three platforms
  Kane SAC Limited (Series 2014-1), Dodeka I, Omamori, Dodeka II, Market Re Ltd. (Series 2014-1), Dodeka IV, Market Re Ltd. (Series 2014-2), Kane SAC Limited (Series 2014-2), Market Re Ltd. (Series 2014-4), Dodeka III, LI Re (Series 2014-1), Leine Re and LI Re (Series 2014-2).
• The biggest catastrophe bond in market history ($1.5 billion)
  Everglades Re Ltd. (Series 2014-1)
• The biggest index-triggered catastrophe bond in market history ($750 million)
  Sanders Re Ltd. (Series 2014-1)
• The first year with four catastrophe bonds covering Japan
  Kizuna Re II Ltd., Aozora Re Ltd. (Series 2014-1), Nakama Re Ltd. (Series 2014-1) and Nakama Re Ltd. (Series 2014-2).

PCS makes a very good point raising these market firsts as they clearly demonstrate and continued deepening and maturity within the catastrophe bond market. The use of private cat bond issuance platforms was particularly pertinent in 2014, opening up the market to many new sponsors of smaller size.

PCS explains; “Sponsors gained access to a broader risk transfer environment, particularly with pricing moving downward. New sponsors came to the catastrophe bond market, and several of 2013’s first-timers returned. Future growth is more likely to come from utility than novelty.

Further structural barriers remain which continue to hold back catastrophe bond issuance, as well as the ongoing need for both cedent and investor education about the risk transfer instruments and the asset class.

PCS highlights some of the initiatives that could help the cat bond market to mature further in 2015; “Factors such as the accelerated adoption of cat bond lite, trigger innovation, and the introduction of loss aggregation platforms for new regions and lines of business could provide another transformational opportunity for the catastrophe bond market — making the current shift seem like a transition to adolescence rather than adulthood.”

PCS Catastrophe Loss Indices as triggers or PCS data used for catastrophe designation featured in $2.8 billion of risk capital issued from 10 cat bond transactions during 2014, consistent with 2013 although is 4% higher if you count cat bond lite transactions with PCS based triggers.

Once again U.S. perils dominated catastrophe bond issuance in 2014, PCS states, with 19 of the 24 transactions that PCS includes in its data exposed to natural catastrophe or weather risks in North America.

2014 catastrophe bond issuance and PCS trigger usage

PCS calculates the addressable market, which it could feasibly provide a trigger and data too under current market norms as $4.8 billion in size. This includes North American cat bond issuance except for those sponsored by publicly managed entities, which PCS says index triggers are not suitable for given their risk profiles.

Of the $4.8 billion PCS index triggers or PCS data were utilised within $2.8 billion of the structures, with the PCS Catastrophe Loss Index featuring in all five index trigger cat bonds in 2014, according to the report. This shows the continued usefulness of the industry loss index trigger, providing a valuable way to calculate by proxy how an industry-wide event may impact a sponsoring insurer or reinsurers covered portfolio.

It also shows the important role that independent collection, aggregation and reporting of losses plays in reinsurance and the insurance-linked securities (ILS) market. PCS has been a leading provider of data used to structure and trigger transactions and contracts for many years now and its data plays a central role in the growing use of alternative capital.

PCS also notes the increasing trend towards large catastrophe bonds, at the same time as smaller cat bonds are becoming easier to issue thanks to cat bond lite platforms. The five transactions of $450m or larger helped the average size of the catastrophe bonds PCS’ report includes to grow.

The average size of cat bonds is up by 44% to $324m over 2013 issuance, according to PCS’ research. However there were also ten cat bonds of less than $200m, showing that the market is now accessible by everyone, be they small or large sponsors.

Average catastrophe bond size in 2014

In the fourth-quarter of 2014 PCS triggers featured strongly once again. Half of the transactions PCS recorded used its data within the triggers or for catastrophe designation, equating to 60% of the total risk capital issued (excluding public entities issuance).

In 2014 five indemnity catastrophe bonds used PCS data for catastrophe designation purposes, up from three in 2013. These five cat bonds raised $800m of indemnity risk capital for their sponsors and the addition of cat designation means that only catastrophe events identified by PCS as causing an industry insured loss of $25m or greater would become qualifying events under the cat bond’s terms.

As ever, the PCS catastrophe bond market report contains some more insight on the market and on the services offered by the firm. You can download a copy of the full 2014 cat bond market report from PCS via its website here.

Find details of every catastrophe bond issued in 2014 in the Artemis Deal Directory.