Discipline improves cat bond yields, market continues growth: John Seo

Catastrophe bond yields have improved for the first time since 2012 as a more efficient supply/demand balance takes form in the space, according to the Co-Founder and Managing Principal of Fermat Capital Management, Dr. John Seo.

In a recent note on the current and future trends of the global cat bond market, titled “Cat bonds – issuance, yields and what’s to come,” Co-Founder of U.S. domiciled specialty investment management firm, Fermat Capital Management, LLC said that elevated issuance “has returned the power choice to investors.”

Seo notes that catastrophe bond issuance during 2014 broke records with $8.4 billion worth of deals coming to the market. In fact, according to data from the Artemis deal directory 2014 issuance reached $8.8 billion, although this does include some cat bond lite and private transactions that may not be included in Fermat’s figures.

“An increase or decrease of only 0.25% in offered yields has been enough to take several new cat bond deals this year from 3x over-subscribed to a near or complete failure to launch – a remarkable price discipline considering the general lack of high yielding bonds in traditional bond markets,” explains Seo.

Resulting in cat bond transactions trading at a discount to their original price issue, something Seo says hasn’t taken place in the market since late September 2012.

And the positive cat bond issuance and pricing discipline trend witnessed throughout 2014 appears to be continuing in 2015, Seo continues to explain.

Data from the Artemis deal directory shows that first-quarter 2015 cat bond issuance was a record, totalling almost $2.1 billion.

And early predictions for the current quarter signal much of the same, with reinsurance giant Munich Re recently estimating that 2015 Q2 issuance will surpass $3 billion.

So it’s clear that investors and sponsors alike are still extremely interested in the asset class, and as global acceptance continues to rise, so to will issuance levels and the spread to less developed regions of the globe, where catastrophe risk financing tools can play a vital role in economic and social resilience.

In recent years cat bond participants have had to deal with a lack of major, global catastrophes, something that has impacted reinsurance and primary insurance sectors also.

Should 2015 prolong the benign catastrophe season trend, Seo feels “market conditions could deliver 4 – 5% to cat bond investors this year.”

Emphasising the increased international acceptance and understanding of the benefits catastrophe bond deals can offer investors, societies and economies, Seo draws on recent action taken by the UK government to enable the region to become an insurance-linked securities (ILS) domicile.

Something we reported here at Artemis several weeks ago that derived from the UK’s 2015 Budget announcement.

Seo explains; “the UK government recently announced as part of its budget plans to craft tax legislation to allow cat bonds to be issued from and domiciled in the UK.

“Such a change would lower the cost of bringing cat bonds to market, accelerate growth of the market, and help create even more favourable conditions for cat bond investors.”

Continued and accelerated growth of the global catastrophe bond sector appears imminent, as investors continue to use the asset class for attractive yields and geographical and risk diversification within their portfolios.

If Munich Re’s predictions are correct, mid-year 2015 issuance levels will be around the $5 billion mark, and while this may be some $1 billion shy of the total achieved at the end of Q2 2014, it would signify another healthy year with further outright growth in terms of risk capital outstanding.