Reinsurance broker Willis Re reports that average catastrophe bond spreads declined around -15% to -20% year-on-year in 2014, as cat bond rates dropped to match, or in some cases better, the rates available from traditional property catastrophe reinsurance.
Catastrophe bond spreads and pricing remains at a historic low throughout 2014, as continued inflows of new capital from the insurance-linked securities (ILS) and third-party reinsurance capital investor base soak up any cat bond issuance that was provided.
Willis Re noted in its reinsurance renewals report that non-life catastrophe bond and ILS issuance hit record levels in 2014, counting approximately $8 billion of issuance during the year. Artemis recorded almost $8.8 billion in its Deal Directory in 2014, including private and life related deals.
We can analyse some of the pricing available in the outstanding catastrophe bond market using our range of ILS and cat bond market charts and statistics. In fact our data shows that the reduction in coupon and also spread between coupon and expected loss, from 2013 to 2014 issuance was even more pronounced, but note that we include additional transactions in our data set to Willis Re.
Firstly, our chart of the outstanding catastrophe bond and ILS market broken down by coupon or yield. This chart shows that over 50% of the outstanding market now pays investors a coupon of 6% or less. In fact 37.7% pays ILS investors a coupon of 4% or lower.
Higher yielding cat bond transactions have been few and far between in 2014 and the average coupon paid to investors of 2014 issuance was just 4.56%, according to our data on average coupons vs average expected losses. This is down by -26% from an average coupon of 6.18% in 2013. The chart shows the trend towards lower risk, lower yielding cat bonds in the last two years. The spread between the coupon and expected loss actually declined by around -30% year-on-year, using Artemis’ numbers.
The multiple of the catastrophe bond market in 2014 dropped to a new low, signifying both lower levels of risk being ceded (in terms of expected losses) and the lower spreads or coupons being offered to investors. The multiple of 2014 cat bond and ILS issuance fell -11% to 2.78, compared to 3.14 for 2013.
While catastrophe bond spreads have again declined year-on-year, the rate of decline is aligned with two factors. Firstly the rate of price declines that have been experienced in the traditional reinsurance market, particularly in property catastrophe risks where year-on-year declines are reported as anything around the -20% mark. Secondly there may be an additional discounting on some catastrophe bond rates, as the ILS market capitalises on the efficiency of its capital base, enabling it to lower rates a little further.
As we’ve written throughout the last quarter of 2014, there is increasing evidence that catastrophe bond pricing is nearing a floor. Brokers reports suggest the same and it has been widely noted that of the cat bonds in the fourth-quarter a number priced at the mid-point or even upper end of initial coupon guidance.
This shows that the ILS investor community and ILS managers are aware that a pricing floor has been neared and are keen to establish it. In fact this pricing floor is becoming evident in traditional catastrophe reinsurance as well, Willis Re said that it believes that a pricing floor is emerging, with some reinsurers noted to decline to sign on renewals as they are unwilling to support further price reductions. Rating agency Moody’s said recently that it feels that cat bond price stabilisation is evident as well.
Willis Re said that growth in catastrophe bonds and ILS is expected to continue in 2015, although this could be at a slower rate than seen in 2014. There are no signs of growth in the ILS market abating, Willis Re’s report concludes, which should mean that the record low spreads seen in catastrophe bonds remain available for cedents to benefit from for the foreseeable future.
More reading from Willis Re’s reinsurance renewal report:
Artemis’ Q4 2014 Catastrophe Bond & ILS Market Report – A busy finish to a record year for ILS
We’ve now published our Q4 2014 catastrophe bond & ILS market report.
This report reviews the catastrophe bond and insurance-linked securities (ILS) market at the end of the fourth-quarter of 2014, looking at the new risk capital issued and the composition of the cat bond & ILS transactions completed during Q4 2014. It also includes a brief review of the full-year 2014’s record issuance.