2013 expected to beat catastrophe bond issuance record: Munich Re


Munich Re, the world’s largest reinsurance firm, expects that issuance of catastrophe bonds and non-life insurance-linked securities in 2013 will beat the record volume issued set in 2007, according to its latest quarterly ILS market report.

Munich Re’s Risk Trading Unit is the first of the reinsurers and brokers to publish a quarterly ILS market update looking back at issuance trends during the third-quarter of 2013 and looking ahead to discuss the potential total level of issuance that will be achieved this year.

Munich Re’s statistics on the ILS market only includes non-life ILS, so catastrophe bonds, hence its numbers quoted are lower than the figures we quoted recently in our articles on 2013 catastrophe bond and ILS issuance to date and the overall size of the cat bond and ILS market.

Differences in numbers aside, Munich Re concurs with our forecast that the market has every chance of beating the issuance total set in 2007 this year. There is a caveat around this forecast, to do with when transactions actually complete as some may run into January 2014. So the volume of cat bonds (and ILS) marketed in 2013 is almost certain to beat 2007, if the pipeline predictions from market participants are right, and the volume of ILS and cat bonds completed in 2013 has a very good chance of setting a record too.

With that out-of-the-way let’s look at some of the highlights of Munich Re’s ‘Insurance-Linked Securities (ILS) Market Update Q3 2013’ report.

Munich Re recorded a record level of catastrophe bond issuance in the third-quarter, with continued demand from investors allowing sponsors to issue more U.S. peril cat bonds in the quarter than we would typically see during hurricane season. Munich Re recorded $1.45 billion of issuance in Q3 2013, which with maturities of just $346m in the quarter saw the outstanding cat bond market grow by $1.104 billion to $17.927 billion, a record size on Munich Re’s numbers.

Andreas Müller of the Munich re Risk Trading Unit explained; “Issuance activity during the third quarter was once again dominated by US perils, as excess capacity among investors allowed the placement window for US issuances to extend beyond the second quarter.”

The volume of issuance was helped by high demand from investors for cat bond paper, with most transactions increasing in size during Q3 and sponsors finding attractive pricing, which combined helped the market reach this record issuance volume.

Müller commented; “Most issuances during the Q3 2013 were priced below initial guidance and upsized from initial target volumes. With a total non-life issuance of $1.45bn, Q3 2013 marks the busiest third quarter in the market’s history and brings the total amount of risk capacity provided by the cat bond market to $18bn.”

Using Munich Re’s figures on issuance and maturities in 2013, the reinsurer calculates that the ILS and cat bond market has seen $2.3 billion of net capital inflows during the year so far, which has helped take the outstanding size of the market from $15.62 billion to $17.927 billion. The chart below shows inflows and outflows of capital in the ILS market by quarter in 2013.

ILS market in- and outflows ($m, excl. mortality bonds)

ILS market in and outflows ($m, excl. mortality bonds) - Source: Munich Re

Interesting to note is that Munich Re records the growth of the catastrophe bond and non-life ILS market as $5.1 billion of net capital inflows since the end of 2011. That is very impressive growth in less than two years.

The report from Munich Re discusses the increasing importance of the state insurance entity, insurance pools and catastrophe funds, in the cat bond market and says that these state sponsors have been responsible for about 25% of cat bond issuance in 2012 and 2013 year-to-date.

The growing importance of the state sponsored catastrophe bond to the ILS market is particularly evident looking at this chart from Munich Re’s report, as is the shrinking importance of reinsurer sponsors as primary insurers find increasing value in cat bonds as a form of reinsurance.

Catastrophe bond issuance volume by sponsor type

Catastrophe bond issuance volume by sponsor type - Source: Munich Re

In terms of an outlook for the rest of 2013 Munich Re is confident that the market will approach the record level of issuance seen in 2007. To date Munich Re has recorded $5.48 billion of catastrophe bond issuance in the first three-quarters of the year, making 2013 the busiest year in the markets history by its numbers.

Munich Re sees $2.7 billion of maturities due by the end of March 2014, which is a lot, and suggests that this may spur even more deals to launch in 2013. It expects sponsors to seek to renew their maturing cat bonds and also expects a number of new sponsors to come to market as well.

Bearing this in mind Munich Re forecasts $7 billion of catastrophe bond issuance in 2013, which will beat the $6.8 billion it recorded in 2007. Munich Re expects this to bring the size of the market to $19 billion, by its reckoning, by the end of the year.

Andreas Müller stated; “Given the current momentum in pricing and issuance, we expect 2013 to beat 2007 as the market’s busiest year and total issuance to reach roughly $7bn.”

You can access a copy of the quarterly ILS market report from Munich Re here.

Note: Munich Re only includes natural peril catastrophe bonds in this report and does not include all private cat bonds that we have written about, thus explaining the differences between its figures and those recorded by Artemis in the recent articles below.

2013 catastrophe bond issuance hits $6.24B

Catastrophe bond market hits $19 billion outstanding for first time

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