Credit rating agency Standard & Poor’s said it believes that 2014 will see a similar level of catastrophe bond issuance to the volume seen in 2013, with favourable ILS pricing set to drive 2014 cat bond issuance.
In 2013 Artemis recorded $7.6417 billion of new catastrophe bonds and insurance-linked securities (ILS) issued during the year, all of which are listed in the Artemis Deal Directory. During 2013 Standard & Poor’s assigned ratings to $5.16 billion of the new cat bond issuance, slightly below its record of $6.1 billion S&P rated cat bonds in 2007.
So for S&P to say that it expects 2014 cat bond issuance to be comparable with the level seen in 2013 is very positive for the market.
S&P expects $3.8 billion of maturing catastrophe bond in 2014, slightly under the $4.2 billion of 2014 cat bond maturities we wrote about here. While those are high numbers of maturing cat bonds and the market has actually shrunk slightly since the end of 2013 so far this year, it is expected that issuance will outstrip maturities easily and we could see an outstanding cat bond market of $22 – $23 billion or more by the end of 2014.
The currently attractive and record low pricing on new cat bond transactions is set to drive issuance this year. S&P said that it has spoken with potential new sponsors who are looking to enter the cat bond market due to the currently favourable pricing on capital markets backed reinsurance alternatives.
Artemis agrees with this, our own discussions suggest that there are a number of potential sponsors who may look to issue cat bonds in the run up to the U.S. hurricane season, as cedents look to lock in the currently attractive pricing for a number of years. Should the market experience an active hurricane season with a number of losses to reinsurers then we may not see such attractive ILS pricing, as is currently available, for a while.
The factors which could hold back ILS and catastrophe bond issuance in 2014 are largely due to competition, said S&P. Aggressive competition from traditional reinsurers could hold back cat bond issuance somewhat this year, S&P explained. But it’s not just the traditional side of the market, cat bonds are now coming under increasing competitive pressures from other alternative reinsurance capital structures, such as collateralized reinsurance.
On the subject of pricing, S&P said that while declines in cat bond interest spreads have been steep, further declines through 2014 are possible but it does not expect to see interest spreads drop as much as in 2013. Barring a major catastrophic event, however, S&P does not anticipate cat bond interest spreads increasing this year.
So Standard & Poor’s remains reasonably bullish on the outlook for the catastrophe bond market in 2014. So far this year issuance has been reasonably strong to date, not quite enough to outstrip maturities but not far off if you include the private and unrated cat bond deals recorded in the Artemis Deal Directory.
Most market participants and observers Artemis has spoken with suggest that $6 billion of issuance in 2014 should be easily possible, barring a major catastrophe event or other market dislocation. If issuance can come close to the level seen in 2013 the market could be looking at an outright size of $22+ billion by year-end, based on Artemis’ numbers.
Read our article from yesterday on Standard & Poor’s answers to investor questions on alternative reinsurance capital.
More details on 2013 catastrophe bond and ILS issuance.
Details of the volume of cat bonds scheduled to mature in 2014.
Details of every catastrophe bond transaction can be found in the Artemis Deal Directory.