Cat bond pricing holds steady, ample capital still available: GC Securities

by Artemis on December 14, 2015

Catastrophe bond pricing held largely steady during the third-quarter of 2015, according to GC Securities, with demand most robust for the highest yielding issuances but ample capital available to support deals as investor interest is still high.

GC Securities, the investment banking and broker-dealer arm of reinsurance broker Guy Carpenter, forecasts the continued growth of the catastrophe bond as a source of risk transfer and reinsurance capacity, with plenty of capital available to support ongoing ILS market growth.

The unit also expects a continued expansion of catastrophe bonds and ILS, into new perils and regions, with further innovation in terms of the structure of the protection offered through the cat bond and continued entry of new cedents looking for an efficient alternative to traditional insurance or reinsurance.

In its latest quarterly cat bond market report, GC Securities details the $650 million of issuance from three transactions that it recorded in the quarter, discussing industry trends, the capital inflow and the ILS market’s prospects for Q4 and beyond.

The catastrophe bond market and its investors continued to display discipline in the third-quarter or 2015, with pricing generally holding steady and investors spending time on portfolio management, according to GC Securities.

Investment managers in the insurance-linked securities (ILS) and catastrophe bond space have shown that they can raise additional capital as required to support transactions in recent months.

GC Securities said that it believes that ample capital is available to support cat bond issues and that ILS managers are “continuing to grow pragmatically, grow assets under management or hold at constant levels.” ILS fund redemptions “remain far more the exception than the rule” GC Securities said.

Cory Anger, Global Head of ILS Structuring at GC Securities, commented; “As we progress through the fourth quarter, over 70 percent of outstanding catastrophe bonds are exposed to U.S. tropical cyclones and earthquakes. Although these perils in particular continue to drive the ILS market, we expect that 2016 will see new perils, new geographies, new types of protection structures and new sponsors emerge.”

While pricing held steady in Q3 2015 from the previous quarter, it has led to a shift in forward outlooks, GC Securities explained. On balance, interest is highest in cat bonds with higher risk spreads, again reflecting investors demand for yields to assist them to maintain returns to their investors.

GC Securities says that it forecasts continued growth of the catastrophe bond market, and that if conditions persist they expect to see cat bonds increasingly used as “a source of stable risk transfer capacity.”

“Over the past 5 years, GC Securities has seen roughly 15 to 20 percent of 144A P&C cat bond market growth across the ILS marketplace and expects alternative capital to continue to serve as a consistent source of risk capital for (re)insurance companies and corporates in the year to come,” the firm explained.

On the pricing side GC Securities believes that further “dramatic spread reductions from current levels” is unlikely, while investors remain focused on compression of their returns. Some exceptions may exist, in terms of specific risks that aid portfolio construction and diversification, the firm notes in the report.

Cedents and investors continue to strive for further diversification, the focus to expand “beyond natural perils grows stronger each day,” GC Securities continues. As a result expansion into new perils is likely, albeit at a steady rate.

“Sourcing diversifying risk can be challenging” given the competition from traditional reinsurance capital for these risks, GC Securities said. But the firm believes further geographic penetration is likely, as reinsurance grows into these markets “we believe it is a matter of time before these regions “open up” to alternative capital.”

Looking ahead, recent trading conditions are expected to “continue to attract new and repeat sponsors” GC Securities says, while continued innovation in deal structures and risk transferred will ensure “continued growth for the asset class.”

“We believe that alternative capital structures will be a consistent source of risk capital for (re)insurance and corporates and expect to see sustained high growth to continue in this sector,” the report closes.

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