PCS index triggers widely utilised in 2015 cat bond issuance

by Artemis on January 6, 2016

The latest catastrophe bond report from Property Claim Services (PCS) highlights the continued use of PCS data for both index triggers and independent catastrophe designations, in the maturing insurance-linked securities (ILS) space.

Excluding cat bond lite transactions, private ILS deals, and deals focused outside of the property catastrophe insurance or reinsurance sector, PCS’ 2015 cat bond market report, titled “Market Growth and Original Risk”, counted $6 billion of catastrophe bond issuance during 2015, roughly 25% less than witnessed in the previous year.

Despite the decline in issuance from 2014, which can be explained due to it being a year that saw multiple large reinsurance or retro deals come to market, including the $1.5 billion Everglades Re transaction from Citizens Property Insurance, a significant portion of the $6 billion continued to utilise PCS data in some form.

Of the 24 transactions reported by PCS nine utilised a PCS trigger, amounting to $2.1 billion, or 35% of the total risk capital issued during last year. While this represents a slight decline on the number of transactions that used a PCS trigger in 2014, at ten, and $2.8 billion, full-year issuance was higher at $7.8 billion from 24 transactions.

The $700 million decline in issuance volume, notes PCS, drops to $500 million when index-triggered cat bond lites are included.

“Part of the reason for the drop was last year’s many large transactions that didn’t need to be repeated this year, such as Kilimanjaro Re and Sanders Re catastrophe bonds. Together they accounted for 61 percent of last year’s PCS-triggered issuance activity,” explains PCS.

Despite this, the portion of cat bonds issued during 2014 and 2015 that used a PCS index trigger, or data for independent catastrophe designation in indemnity triggers were very close, at 35.8% and 35%, respectively. Underlining the continued value PCS data and triggers bring to sponsors and investors in the ILS market.

Furthermore, explains PCS, all three catastrophe bonds that covered parts of Canada during 2015 utilised the PCS Catastrophe Loss Index, up from just one out of three in 2014.

However, another transaction during 2014 did use PCS data for independent catastrophe designation, but the PCS trigger use did increase to $1.1 billion last year, up from $600 million in 2014.

“In addition to being the most widely used index trigger in the world last year, PCS was the only index trigger used in catastrophe bonds for Canada,” said PCS.

Another sub-section of the ILS and catastrophe bond market PCS explores in its recent publication, ‘Market Growth and Original Risk: PCS FY 2015 Catastrophe Bond Report,’ is the growing cat bond lite issuance trend.

While no cat bond lite transactions came to market during the final quarter of last year, total issuance amounted to $490 million from 16 transactions, more than doubling the $242 million reported for the whole of 2014, according to PCS.

Again, the PCS Catastrophe Loss Index was prevalent in the cat bond lite space, with 50% of the transactions, and roughly 41% of the capital issued utilising the index.

PCS explains; “With index triggers available from PCS for Canada and now Turkey, the opportunity exists for smaller stand-alone ILS transactions for risks in these markets, likely on a retrocessional basis.”

Catastrophe bond issuance remained strong in 2015, and as highlighted by PCS the cat bond lite sector continues to expand also, with investor and sponsor appetite and sophistication increasing.

As more capital comes into the sector from new, and existing geographies and risks, it’s likely the PCS index trigger and catastrophe loss data will continue to play an important role in the issuance of catastrophe bonds in North America, Canada, and beyond.

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