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Cat bonds: $7 billion+ issuance, $17 billion+ outstanding possible by year-end, says GC Securities


Yesterday the Catastrophe Bond Update: First Quarter 2013 report was published by GC Securities, the capital markets specialist arm of reinsurance broker Guy Carpenter which is involved in many recent catastrophe bond deals as a structurer, arranger or bookrunner. In an article we published yesterday, we largely covered the discussion of the growing influence that third-party capital has had on catastrophe bonds as the market matures.

Today we thought we’d cover GC Securities bullish forecasts for the catastrophe bond market over the remainder of 2013, both in terms of expected issuance and the forecast level of risk capital that would be outstanding in active cat bond deals when 2013 comes to a close.

The first-quarter of 2013 helped risk capital outstanding to increase by $167.5m, once $352.5m of maturing cat bonds are accounted for, according to GC Securities numbers on the market. On its reckoning, risk capital outstanding hit an all-time high of $15 billion at the end of Q1, up from the previous record set at the end of 2012 of $14.83 billion.

Seeing growth in the overall size of the market is extremely positive, despite Q1 2013 being quieter than had been expected. GC Securities said that this was the eighth consecutive quarter of outright growth in the size of the cat bond market and that risk capital outstanding is up more than 17% in a year, since the end of Q1 2012.

Two years of consistent growth in the amount of risk being transferred using cat bonds is encouraging and it’s clear that the additional interest being shown and capital being deployed by third-party and capital market investors is being put to good use in insurance-linked security and cat bond transactions.

Will that growth continue is the question we now turn to. There are a lot of maturities to come through the remainder of 2013, as we’ve noted before here, with an additional $2.99 billion set to mature by the end of 2013 according to GC Securities. The table below taken from the report shows the volume of maturing cat bonds by quarter through to Q1 2014.

Upcoming catastrophe bond maturities

Upcoming catastrophe bond maturities - Source: GC Securities

As you can see, most of the maturities in 2013 come in the current quarter, with $2.538 billion in Q2 alone, and from then on to the end of the year maturities are light at just over $450m.

Looking at the deals we have listed in our catastrophe bond Deal Directory for Q2 so far, the total volume issued is already greater than the volume of expected cat bond maturities. We have, at current deal sizes, $2.668 billion listed in the Deal Directory for Q2 alone meaning that by the end of this quarter the volume of risk capital outstanding will rise again. It should be very easy for issuance to outstrip maturities as we move through Q3 and Q4 so it looks likely that 2013 will see strong outright growth in terms of cat bond risk capital outstanding.

GC Securities expects outright growth as well, saying that given its current expectations about the deal pipeline, risk capital outstanding should continue to increase over the rest of 2013. GC Securities is bullish both in terms of volume issued this year and the growth of the market.

GC Securities says that based on the recent pipeline it sees an expected level of additional issuance (post Q1) of $5 billion to $7 billion as possible through the last three-quarters of the year. This, it says, should support growth in catastrophe bond risk capital outstanding to between $17 billion and $19 billion.

$7 billion of issuance for 2013 as a whole is now looking realistic, we currently have just under $3.4 billion recorded in our Deal Directory. $17 billion of risk capital outstanding is also very realistic, even if issuance doesn’t hit that magical $7 billion figure we could see the market grow to that size this year. Of course it does depend on whose numbers you use, but what really matters is outright growth for the sector and right now that looks like a certainty in 2013.

GC Securities notes that a number of critical factors could affect these targets, including pricing capacity and terms in the traditional and retrocessional reinsurance markets. The occurrence of any major catastrophes, or an active U.S. hurricane season, which affect any cat bonds could also slow growth for a time.

This chart from the GC Securities report shows the growth experienced in the catastrophe bond market over the last two years, a healthy upward trend which we hope to see continue through the rest of 2013.

Read our article from yesterday discussing this report: As pricing decouples, the catastrophe bond market grows up.

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Catastrophe bond risk capital outstanding 31st December 2004 to 31st March 2013

Catastrophe bond risk capital outstanding 31st December 2004 to 31st March 2013 - Source: GC Securities

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