2014 continues to look capable of breaking records for catastrophe bond issuance, with this year still up on the last helped by an increased focus on the insurance-linked securities (ILS) markets’ sweet spot of U.S. perils, according to Property Claim Services (PCS).
PCS only covers property catastrophe bonds officially in its report, which makes the third-quarter look empty with no issuances. Artemis, on the other hand, includes all cat bonds and insurance-linked securitizations (ILS) on which we can gather information, which gives us an issuance total of $364m (see our Q3 report for more).
PCS notes in its Q3 2014 Catastrophe Bond Market Report that the third-quarter saw dramatically lower issuance than a year earlier when it recorded $1.5 billion of issuance in Q3 2013. However, last year was an anomaly, PCS explains, with an untypical amount of third-quarter cat bond activity occurring.
PCS cites average third-quarter cat bond issuance activity as being $680m, which does show you just how low 2014 has been even by Artemis’ number of $364m. On PCS’ numbers Q3 of 2014 is the first quiet third-quarter in more than ten-year of the catastrophe bond markets’ history.
For the first nine months of 2014 PCS has recorded $5.7 billion of cat bond issuance (compared to the $6.63 billion in the Artemis Deal Directory which includes private deals, health and workers comp-linked). PCS has this as a 6% year-on-year increase, but this would have been much higher had the third-quarter lived up to expectations.
For the first nine months of the year use of the PCS Catastrophe Loss Index or PCS data for catastrophe designation in cat bond transactions slipped very slightly to $2 billion, from $2.1 billion of risk capital issued in the first nine months of 2013. That is still a healthy percentage given the attractiveness of indemnity covers in the current soft market environment, which tends to result in fewer index or parametric triggers being used.
Catastrophe bonds containing exposure to U.S. perils are up year-on-year so far, showing the ILS market continues to look to deploy its growing capital base into the core U.S. property catastrophe zones where risk capital is most required and often pays the highest returns.
In fact, issuance of cat bonds with North American exposure is up 12% year-on-year, by PCS’ reckoning, which is almost twice the growth rate of the total market over the same period, showing that the ILS market sweet spot remains in the U.S. This perhaps reflects the lower-cost of ILS capital and its ability to deploy capacity into U.S. perils at lower rates than some traditional providers, as well as the strong growth in alternative reinsurance capital seen in the last year or two.
The number of transactions issued fell, on PCS’ numbers, but the average transaction size is up considerably to $317m. A number of very large transactions issued during the first-half of the year are responsible for the jump in average size, the $1.5 billion Everglades Re Ltd. (Series 2014-1), the $750m Sanders Re Ltd. (Series 2014-1) and the $450m Kilimanjaro Re Ltd. (Series 2014-1).
Despite the lack of issuance activity in Q3 this year, PCS believes the cat bond market remains on track for a record. A repeat of last year in Q4 would see a record level of issuance on PCS’ numbers and just $1.5 billion of fourth-quarter cat bonds would take issuance above last year’s level.
We’ll have to wait and see whether issuance can reach record levels for 2014. PCS wisely notes that a number of factors may affect Q4 cat bond issuance, including the glut of capital in the market which can make traditional covers more competitive, industry loss warrants (ILW’s) more appealing or collateralized reinsurance a preferred option.
PCS explains further:
Additionally, some sponsors have not integrated annual catastrophe bond issuance activity into their risk transfer programs, and transactions with longer tenors may obviate the need for annual issuance. Finally, there’s the question of how many new sponsors will enter the market in the fourth quarter, which is difficult to forecast. While it seems that ample interest exists, some prospective sponsors may either decide not to enter or push their decisions to the first quarter of 2015.
Find details of every catastrophe bond issued so far in 2014 in our Deal Directory.
Artemis’ Q3 2014 Catastrophe Bond & ILS Market Report – A lazy summer for ILS
We’ve now published our Q3 2014 catastrophe bond & ILS market report.
This report reviews the catastrophe bond and insurance-linked securities (ILS) market at the end of the third-quarter of 2014, looking at the new risk capital issued and the composition of the cat bond & ILS transactions completed during Q3 2014.