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Catastrophe bond issuance and on-risk capacity at 30th June 2012


Yesterday we wrote our first article about the insurance-linked securities and catastrophe bond market report published by Willis Capital Markets & Advisory (WCMA), the capital market division of global broker Willis. The report covers the cat bond and ILS markets issuance from Q2 of 2012 as well as providing insight into other areas of the capital market backed catastrophe risk and reinsurance sector. The report contains some useful data graphs which we will cover here and in future articles.

The first set of charts in the WCMA report cover the issuance of cat bonds and the size and make-up of the outstanding cat bond market at the 30th June 2012. After two consecutive quarters of very healthy issuance the market sits in a good position to achieve growth in 2012 and Bill Dubinsky, Head of ILS at WCMA, said; “In the absence of a significant catastrophe, we would expect the total issuance for this year to be in the $5.5 billion to $6 billion range.”

We’ve already seen a possible $250m of cat bonds in Q3 and the investment community has suggested we will see more deals during this quarter which should help the potential for the market to achieve decent outright growth this year. The chart below from WCMA shows that Q1 of 2012 saw record issuance by over $300m which is impressive, Q2 was the second highest Q2 on recent record. We would hope to see a record Q4 again this year as sponsors seem keen to secure cat bond coverage in the run up to the January renewals and given recent market conditions and pricing there is no reason to expect sponsor appetite will diminish over the rest of 2012. If capital is still readily available we believe sponsors will take advantage of it to secure attractive rates in the cat bond market.

Non-Life Cat Bond Issuance by Quarter (2008 – 2012 YTD)

Non-Life Cat Bond Issuance by Quarter (2008 – 2012 YTD) (*$ in millions)

The next chart from the WCMA report is one which shows the amount of catastrophe bond capacity issued and outstanding by year. As you can see the market was just below record levels at the 30th June 2012, with $14 billion outstanding according to Willis’ numbers compared to $14.1 billion in 2007. That’s up by $700m since Willis’ end of Q1 report which is a decent amount of growth for a single quarter. At this moment the market may actually be level with the 2007 record as we’ve had another $100m added to the capacity outstanding number by the recently completed Queen Street VI Re Ltd. Whether we will see 2012 issuance volume come close to that seen in 2007 will depend a lot on whether investor capital continues to seek to be deployed within the reinsurance sector. If investor appetite and interest in cat bonds remains as high as was seen in the first half of the year  there is a chance that the market could see the 2012 issuance volume achieve a higher level than is expected. Also evident from this chart is that the market has achieved its $3.4 billion of issuance in a below average number of deals, suggesting average deal size might be growing. Of course the $750m Everglades Re has contributed to that feature of the market as well.

Catastrophe bond capacity issued and outstanding by year

Catastrophe bond capacity issued and outstanding by year - Source: WCMA Transaction Database as of June 30,2012.

The final chart in this piece shows the mix of perils making up the non-life ILS and cat bond market at the 30th June 2012. U.S. hurricane exposure continues to dominate the market, and has actually become a growing percentage of the outstanding cat bond market at 73%. Sponsors and deal structurers have found new ways to provide diversifying opportunities for investors within U.S. hurricane exposed deals by careful wording, structuring and selection of perils within transactions. So at this point in time the hurricane-heavy nature of the cat bond market is not a problem but it is widely felt that further diversification into other perils and geographies is required for the future health of the cat bond market.

On-risk catastrophe bond capacity by peril

On-risk catastrophe bond capacity by peril

It is going to be interesting to see what perils dominate the cat bond market over the remainder of 2012. We’ve heard of a number of sponsors discussing issuance of Japanese peril exposed cat bonds and also expect to see a number of European peril bonds. There is also a chance that MultiCat Mexico may renew, it matures in October 2012 and we understand that there have been some discussions about a renewal.

We’ll bring you more data points from the Willis Capital Markets & Advisory report in the near future. Meanwhile you can download and read the full report here.

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