There appears to be a gradual shift towards privately placed catastrophe bond transactions, or cat bond lites, as smaller, more efficient structures increasingly come to the ILS market, rather than full-blown 144A affairs, according to Property Claim Services (PCS) new report.
Despite record levels of issuance over recent quarters PCS notes that larger transactions from a shrinking number of overall sponsors are coming to market, as well as more smaller, private cat bonds from a growing number of new sponsors.
However the provider of catastrophe industry loss data and reports also notes that public entity sponsors are increasingly placing cat bonds at the heart of their risk transfer programs.
In its latest catastrophe bond market report, titled ‘Public and Private: PCS® Q2 2015 Catastrophe Bond Report‘ PCS highlights two key trends of the quarter as public entities continued use of cat bonds and the private or cat bond lite trend.
Both of these trends are positive for the catastrophe bond and ILS market. The market needs large, public entity sponsors to appreciate the risk transfer and security of collateralized reinsurance through securitisation, something they clearly do. And private cat bonds attract new blood, as smaller sponsors are able to access sources of ILS capacity more efficiently and cost effectively.
Public entities accounted for more than half of catastrophe bond capacity raised in the second quarter, PCS notes, while private cat bonds have already beaten the total 2014 issuance from these smaller structures.
PCS notes that the first-half of 2015 has seen a number of familiar faces fail to return to the cat bond market, a factor of the cheaper traditional reinsurance capacity and also the ongoing centralisation and rationalising of reinsurance buying. At the same time the number of new sponsors named also shrank.
PCS notes “an apparent shift to more flexible structures with lower frictional costs (such as cat bond lite and collateralized reinsurance)” as factors that have contributed to the reduction in full-blown Rule 144A catastrophe bond issues.
There is also more choice available to sponsors now, from 144A right the way through to securitization of cell structures as cat bond lites and collateralized reinsurance, with different levels of effort, cost and regulatory compliance at each end of the spectrum. The increasing choice for sponsors looking to tap the ILS markets capacity is a healthy development.
“The market doesn’t need a constant string of record-setting quarters to be healthy. In fact, the second-quarter respite from new heights may be a natural stage in the maturity cycle as potential and existing sponsors evaluate the alternatives available to them in optimizing capital management,” PCS explains.
Artemis concurs entirely with this sentiment. Markets tend to fluctuate in terms of issuance and the fact that first-half 2015 catastrophe bond issuance has been so healthy, despite the higher competition and lower cost of traditional reinsurance covers, demonstrates the growing appeal of the collateralized product range.
On PCS’ numbers, which only include property catastrophe bonds, exclude private deals and some of the other transactions Artemis features in the Deal Directory, this is still the second most active first-half on record, an impressive stat for the market.
The changes to the sponsor base are telling, PCS notes, including the prevalence of the public entity sponsor in Q2 and the absence of some familiar names.
To Artemis, this is a function of the changing buying habits among large primary insurers. There is a strong likelihood that these insurers, who have spent the last year rationalising their reinsurance buying strategies, will come back to the cat bond market when the time is right, particularly when traditional reinsurance costs rise again.
As the graphic above suggests, we have seen a continued increase in the use of indemnity triggers, again a factor of the markets low pricing and high levels of competition. It also reflects the type of sponsors seen during the year.
The second quarter saw no index deals, although two of the indemnity transactions used PCS data for catastrophe designation, a growing feature of indemnity cat bonds where a third-party agency is desired to identify what events can qualify.
Six transactions so far in 2015 have used PCS catastrophe data within their trigger, totaling deal volume of $1.3 billion and demonstrating the continued appreciation of the index-trigger by both sponsors and investors alike.
Cat bonds from public entities accounted for 53% of the data under review in Q2 included in PCS’ latest report, while almost a third of first-half deals are attributed to these entity sponsors.
This is also testament to the work of the reinsurance broking community, to educate and turn public entities on to the opportunities that cat bonds and ILS covers present to them.
PCS concludes; “The catastrophe bond market — this year, at least — seems to be focused on specific market niches. This may be a function of the multiyear coverage that catastrophe bonds provide, because some sponsors don’t need to come back to the market every year. It’s worth watching these dynamics, however, to see if they’ll become a constraint on the sector’s growth.”