2013 on track for record if Q4 cat bond issuance similar to recent years: WCMA

Insurance-linked securities and catastrophe bond issuance in 2013 is on course for a record, after a bumper third-quarter saw solid deal-flow, as long as the fourth-quarter see’s issuance at levels similar to recent years, according to Willis Capital Markets & Advisory.

WCMA, the capital markets investment banking and advisory arm of global insurance and reinsurance broker Willis, recorded $1.4 billion of non-life catastrophe bond capacity issued through seven transactions in the third-quarter of 2013. This is slightly below the figure recorded in the Artemis Deal Directory, of $1.68 billion, as at Artemis we include one privately placed cat bond and one mortality-linked ILS deal.

WCMA compares this to the $500m of cat bonds it recorded issued in the third-quarter of 2012 a year earlier. Again, at Artemis we have a slightly higher figure for last year, but 2013 saw at least double the volume of issuance as 2012 in Q3.

WCMA said today, as it released its third-quarter 2013 ILS market update report subtitled ‘Q3: No Summer Break for the Cat Bond Market’, that based on its data, Q3 issuance of catastrophe bonds in 2013 was approximately three times higher than the five-year average and the highest it has recorded since 1998.

Non-life catastrophe bond issuance by quarter - Source: WCMA

WCMA expects the market to achieve record levels of issuance of non-life catastrophe bonds in 2013, as long as Q4 issuance is of a similar level to recent years. With a forward pipeline which currently looks strong, the main factor affecting the chance of the market reaching a new record for annual cat bond issuance will be how busy the market is and whether deals can complete in 2013 or slip into early 2014.

Bill Dubinsky, Head of ILS at WCMA, commented; “If fourth quarter issuance remains at a similar level to that of recent years it will be a record year for ILS issuance, surpassing the 2007 record. Outstanding capacity has now grown in each of the past five years, with the currently outstanding capacity of $17.3 billion, representing an all-time high.”

Non-life catastrophe bond capacity issued and outstanding - Source: WCMA

Again, the outstanding market size figure from WCMA differs to the one Artemis published recently, of $19.012 billion at the end of Q3 (now $19.787 billion with the completion of two more deals in October), due to WCMA’s data only including non-life 144A cat bonds when Artemis includes life and mortality as well as some larger privately placed deals.

WCMA’s report is as ever insightful. It begins with a discussion of the growing focus on ILS and alternative reinsurance capital, but takes a pragmatic view that it sees no winner, traditional or non-traditional reinsurance capital, rather a sensible response in the market of establishing how best to leverage collateralized capacity and cat bonds within reinsurance programs.

Reinsurers meanwhile are seeking to capitalise on investor interest in the reinsurance space by establishing sidecars and fund management operations to manage investor capital, as well as by sponsoring transactions themselves.

Dubinsky commented; “Some investors are encouraging more catastrophe bond issuance so that they can continue to fulfil mandates for liquid investments. Other investors are chasing the illiquidity in collateralised reinsurance as a mechanism to protect themselves from the ruthless price pressure in a well run syndication process.”

Less competition in the placement process for catastrophe bonds can result in better opportunity for investors, explained Dubinsky, but is not necessarily in the sponsors best interests. From this we can assume that the better the book is run, and the greater the number of investors a transaction is marketed to, the better chance the sponsor has of achieving attractive pricing and larger deal sizes.

WCMA expects growth in both catastrophe bonds and collateralized reinsurance as we move towards the end of 2013 and into 2014, but the question is how the split between the two develops. New issuance volume for non-life cat bonds looks set to outstrip the record set in 2007, according to WCMA. The report also notes that if you take out investment grade deals from the record year of 2007, it reduces it to $5.7 billion for the year which makes WCMA’s number of $5.3 billion for the first three-quarters of 2013 much more impressive. In fact, on this basis 2013 issuance has now overtaken 2007’s on a non-investment grade non-life cat bond only basis.

Another factor that will affect issuance levels through Q4 and beyond is how investors and sponsors react to the potential for more flexible terms and conditions and expansion into areas of the market which are less well-modelled. How this plays out will influence whether sponsors target traditional or collateralized reinsurance covers instead, where more flexible terms and lesser modelled risks have been more accepted.

So WCMA says that sponsors could alienate investors, in terms of demanding more than investors are prepared to provide, but investors could also push sponsors away and towards traditional or non-traditional reinsurance instead of ILS and cat bonds if they aren’t prepared to become more flexible and expansive. WCMA also notes that catastrophe loss experience and the financial markets could also impact Q4 issuance.

The report from WCMA also contains a review of each of the non-life catastrophe bond deals it includes within the third-quarter of 2013, as well as some information on secondary cat bond market conditions and an interview with Dr Andreas Müller, Head of Origination, Distribution and ILS investments at Munich Re’s Risk Trading Unit.

You can access a copy of the report via the Willis Capital Markets & Advisory website here.

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