It’s time for another of our quarterly looks at two key metrics which reflect recent trends in the catastrophe bond issuance market. These two metrics demonstrate where insurance-linked securities investors risk appetite lies, when it comes to cat bonds, and how pricing has moved recently.
The third-quarter of 2013 has seen record issuance for the quarter. Willis Capital Markets & Advisory, the capital markets investment banking and advisory arm of global insurance and reinsurance broker Willis, recorded $1.4 billion of non-life catastrophe bond capacity issued through seven transactions in the third-quarter of 2013, the highest Q3 it has recorded.
With the market heading towards a potential record for the amount of cat bond risk capital issued in 2013, one factor that has helped to drive market growth has been the reduction in cat bond pricing, as lower-cost capital takes on that risk. These metrics, the risk premium and expected loss of recently issued catastrophe bonds, show that this trend has continued through the third-quarter.
As ever the WCMA third-quarter 2013 ILS and cat bond market report contains two graphs which show the quarterly, last twelve months, weighted average risk premium and expected loss of the catastrophe bond market. Catastrophe bond issuance is split into U.S. wind and non-U.S. wind, with a graph devoted to each grouping.
Both graphs show further declines in the weighted average risk premiums of cat bond issuance, which shows the average coupon or interest payments on issued cat bond tranches. As risk premiums slide it shows an increased appetite for, or willingness to take on, risk for lower returns among the ILS investment community. As ever though, it is the multiple of expected loss to risk premium which really tells the tale there.
Looking at U.S. wind issuance first (see the graphs further down this article), the weighted average expected loss of U.S. wind issuance has remained static from Q2 to Q3, at 2.2%. At the same time thought the weighted average risk premium of U.S. wind exposed cat bond issuance has declined by another 0.2%, from 7.6% in Q2 to 7.4%. That gives a weighted average multiple of 3.36x for U.S. wind cat bond issues.
For non-U.S. wind cat bond issues the change in Q3 is more dramatic. The weighted average expected loss of non-U.S. wind cat bonds has dropped by a third, from 1.5% to just 1.0% in the third-quarter. At the same time as the riskiness of the issued bonds has dropped the average risk premium has dropped even more, from 4.2% at the end of Q2 to just 2.5% at the end of Q3. That gives a multiple of 2.5x for non-U.S. wind cat bonds, the multiple having dropped from 2.8x in the quarter.
So the multiple applied to new catastrophe bond issues keeps dropping as rates declined further in Q3. The rate decline on non-U.S. wind was dramatic, but likely caused by some lower risk issuance coming to market.
Both U.S. wind and non-U.S. wind cat bond issues continue to display a trend for growing acceptance of catastrophe risk by ILS investors, willing to take on more risk for slightly lower returns. It will be fascinating to see what happens at the end of the year, particularly if there is a glut of new issuance for investors to digest. We will update you again in Q1.