2018 cat bond issuance expected to be at least $10bn: GC Securities

Catastrophe bond issuance broke records in 2017 surpassing $10 billion for the first-time in the market’s history, and despite the impacts of third and fourth-quarter catastrophes, reinsurance broker Guy Carpenter is expecting another double-digit issuance year.

This is according to Cory Anger, Managing Director, Global Head of ILS Origination and Structuring at GC Securities, the capital markets and insurance-linked securities (ILS) arm of Guy Carpenter.

“More than USD 4.3 billion of cat bonds is expected to mature in the first half of 2018, and more than USD 5.7 billion in 2018 overall. When combined with the pricing performance of cat bonds in Q3 and Q4 2017, and the potential volatility in traditional capacity/pricing following Q3/Q4 2017 catastrophe losses, we estimate total cat bond issuance in 2018 will be at least $10 billion,” Anger told Artemis, as part of a discussion on the ILS market in 2017 and looking further into 2018.

Chi Hum, Managing Director, GC Securities, also participated in the discussion, underlining the impressive level of issuance seen last year as reinsurance companies returned to the sector as sponsors.

“Catastrophe (cat) bond issuance saw a record year in 2017, with over USD 10 billion issued, and there is in excess of USD 25 billion in outstanding limits. We saw the return of reinsurers as sponsors, and the World Bank increased its presence by launching a bond covering a new peril – pandemic risk – and continuing the wind and quake protection program for Mexico with the Fonden transaction,” said Hum.

Following the impacts of 2017 catastrophe events, attention turned to the catastrophe bond and ILS market and how it would react in the face of large losses, as well as the impact the events of the third and fourth-quarter might have on the pricing of ILS transactions.

“Subject to a specific client’s exposure, actual versus expected loss performance, deal size, risk layer, and trigger structure and style, 144A cat bonds for perils in non-loss affected zones generally saw no pricing change at January 1 relative to pre-Q3/Q4. Remote layers for perils in loss affected regions saw no pricing change to a 3 percent increase, while working or risky layers in such regions (including 144A cat bond structures that would experience losses if 2017 events reoccurred) saw up to a 15 percent increase,” explained Anger.

Industry commentary during renewals has highlighted the sophistication and maturity of the ILS sector following recent events, and renewal pricing to date has demonstrated both the stability and reliability of the catastrophe bond and ILS investor base, continued Anger.

Adding that in 2018 the reinsurance broker expects “new sponsors to complement their existing reinsurance programs by entering the cat bond market to secure capacity and stabilize limits.”

Hum, expanded on this point, underlining the potential for further ILS market growth as firms look to increase their access to third-party, or alternative reinsurance capital.

“Many large insurers have earmarked percentages of their reinsurance program for non-traditional capacity like capital markets. These companies are increasingly looking at their risk on a holistic basis and optimizing their spend on reinsurance.

“We anticipate that public entities and corporate risk programs worldwide will continue to increase their participation as discussions between risk managers, enterprise risk boards, CFOs and finance managers coalesce around contingent business interruption and earnings interruption concerns.

“Having access to third party capital is increasingly seen as a measure of senior management’s preparedness to be successful in a changing environment. This trend will potentially expand beyond property cat to other lines of business and geographies,” said Hum.

The cat bond market has got off to a good start thanks to the near $1.4 billion issuance from the Pacific Alliance via the World Bank. It doesn’t take many of these larger deals to begin pushing the year towards new records.

It will be interesting to see just how active catastrophe bond issuance is in the months ahead, and whether investor and sponsor appetite is sufficient to produce another year of $10 billion+ issuance, as anticipated by Guy Carpenter.