Strong cat bond issuance to continue, sponsor base to broaden: Munich Re

by Artemis on October 19, 2015

One of the world’s largest reinsurance firms Munich Re, has underlined the growing sponsor base of insurance-linked securities (ILS) following strong issuance during the third-quarter, with an expectation that public entities will increasingly look to participate in the catastrophe bond market.

Despite rates being pressured in the global insurance, reinsurance and ILS markets in recent times, catastrophe bond issuance during 2015, and in particular the third-quarter, which is typically a quieter period, has remained strong, following on from the record-breaking volumes of issuance seen last year.

According to reinsurer Munich Re’s Q3 ILS market report, roughly $780 million of cat bonds were issued during the quarter, the second highest ever recorded during a Q3.

However, data from the Artemis Deal Directory, which includes a number of private deals and the $298.89 million Bellemeade Re Ltd. (Series 2015-1) transaction from United Guaranty (AIG), deals that aren’t included in Munich Re’s totals, takes total issuance in Q3 to $1.093 billion.

Whether using the Artemis or Munich Re total one thing remains clear, issuance in Q3 2015 was the second highest ever recorded during the period, surpassed only by 2013, and the sponsor base of ILS transactions in the sector is increasing.

“The ILS sponsor base has continued to grow throughout the last years, with new sponsors accounting for 15%-25% of issuance every year since 2010,” explains Munich Re, continuing to stress that it expects this trend to continue going into 2016 and beyond.

The catastrophe bond market has been making steady progress in recent times, with record-breaking deals like the $1.5 billion Everglades Re (Series 2014-1) deal issued last year, and new regions and perils being introduced to investors as well, including the recently launched $50 million Panda Re Ltd. (Series 2015-1) deal from China Re, the first cat bond focused on Chinese risks.

Driving the expanding sponsor base of ILS transactions, notes Munich Re, is the current pricing environment, the growing acceptance and willingness of investors to accept cedent-friendly structures, and a continued desire for investors to access new and diversifying perils and regions.

The final point here is emphasised by the transactions brought to market during the third-quarter of 2015, which protect against mortgage insurance losses in the U.S., earthquake losses in the U.S., China, Japan and Turkey, and U.S. property catastrophe risks.

So the geographical and peril diversification brought to investors was broad, and came from a mix of private, returning, new and public entity sponsors.

With disaster resilience efforts and developments at the heart of world discussions in recent times, including a call on the insurance, reinsurance and alternative risk transfer sector to play a greater role in tackling the issue, it’s expected that public entities will increasingly seek the use of the capital markets for risk transfer.

An example of this can be seen with the Turkish Catastrophe Insurance Pool (TCIP), which sponsored the $100 million Bosphorus Ltd. (Series 2015-1) deal during Q3 2015, securing protection against Turkey earthquakes.

Munich Re expands on the growing presence of public entities in the sector, and their adoption of rapid-payout, parametric triggers, another from of diversification for investors; “2015 YTD saw an increased share of parametric-based bonds in total issuance, and we expect interest from new public sector sponsors for these structures in the near future.

“As risk models cover more and more regions worldwide and investors remain hungry for diversification and keen to include new perils in their portfolios, this interest is expected to be matched in the market.”

Regarding the current pricing environment, Munich Re said; “With no further price downturn foreseeable, we expect sponsors to lock in current pricing levels via multi-year issuances. Q4 2015 is hence expected to see issuance activity north of $1.5bn, which would lead to further market growth and bring total issuance for 2015 to around $7bn.”

Should issuance levels stay in line with Munich Re’s prediction 2015 could surpass the $8 billion mark when using data from the Artemis Deal Directory, so still some $800 million off the record level of deals seen in 2014.

But clearly the market is growing, aided by the increased acceptance of the asset class and its structures, resulting in a wider range of perils and geographies coming to the cat bond market, which will drive further growth, understanding and acceptance in the future.


Artemis’ Q3 2015 Catastrophe Bond & ILS Market Report – A market making steady progress

Q3 2015 Catastrophe Bond & ILS Market ReportWe’ve now published our Q3 2015 catastrophe bond & ILS market report.

This report reviews the catastrophe bond and insurance-linked securities (ILS) market at the end of the third-quarter of 2015, looking at the $1.093 billion of new risk capital issued and the composition of the cat bond & ILS transactions completed during Q3 2015.

Download your copy here.

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