After the heavy catastrophe loss toll of 2011, which saw a number of catastrophe bonds impacted by natural catastrophe events around the globe, and the impact of a change to a risk model which was core to the cat bond market, the success of 2012 (to date) in the cat bond and insurance-linked securities market is impressive. 2012 has seen records set, volume of issuance nearing an all time high and the size of the outstanding ILS market approaching a peak, all of which add’s up to a quite remarkable year.
In terms of records set, 2012 saw the highest Q1 cat bond and ILS issuance on record which was a great way to start the year off and carried on nicely from the busy Q4 of 2011. Then in Q2 we saw the largest single tranche of catastrophe bond risk ever to come to market in the form of the Everglades Re cat bond, which was not only remarkable for its size but also for the first time cat bond sponsor being Citizens Property Insurance. Now in the third-quarter of 2012 we can see that the size of the outstanding catastrophe bond market is either very close to, or already is at, an all time high. The size of the outstanding cat bond market should continue to grow as we move through Q4, and we will likely finish the year with a record market size, as there is not too much in the way of maturing cat bonds.
Credit rating agency A.M. Best agree in an article in the latest edition of their BestWeek publication. They say that with just one-quarter of the year to go, they have counted almost $4.3 billion of cat bonds issued so far in 2012 which already beats the full year total of $4.28 billion from 2011. The record year for issuance which we saw in 2007 just before the collapse of Lehman and the financial crisis shows $7.43 billion worth of cat bond issuance using A.M. Best’s numbers. The market is bullish on the pipeline for the rest of 2012, but whether we’ll see sufficient issuance to beat that total is hard to predict.
There are a lot of factors which could impact that goal, from investor appetite to rates in the traditional reinsurance market, so we’ll have to wait and see. It is certain though that 2012 will be the second highest issuance year ever for the cat bond market, Asha Attoh-Okine, managing senior financial analyst of insurance-linked securities at A.M. Best, told BestWeek. “Through the third quarter of 2012, it has already been a remarkable year,” Attoh-Okine said.
So we’ve had a remarkable nine months in the cat bond market. In fact it has been remarkable across the ILS, convergence and reinsurance-linked investment sector, as high levels of investor interest have helped to drive this niche of the reinsurance market forwards to become a meaningful component of the overall market. That trend seems destined to continue into 2013 and it is going to be fascinating to watch how the January renewals play out and where the capital flows to in the new year.