We should expect to see more catastrophe bonds being issued by state and government backed insurance entities in the future, as investor demand remains high and costs of sponsoring a cat bond come down, according to Fitch Ratings.
With the price declines on catastrophe bond rates, more options for cheaper ways of issuing cat bonds privately or as unrated instruments and continuing strong investor demand for the cat bond and ILS asset class, state and government insurance organisations can capitalise on the current market conditions.
The cat bond market has seen an influx of deals from these types of entities, many of them repeat sponsors which show their commitment to the ILS investors by bringing regular deals to market. With costs now down issuing repeat deals and also larger deals has become even more attractive for these sponsors.
Examples of deals in the last year from state and government backed sponsors include; MetroCat Re Ltd. from the New York Metropolitan Transit Authority, Pelican Re Ltd. from Louisiana Citizens, Tar Heel Re Ltd. from the North Carolina JUA/IUA and of course Everglades Re Ltd. from Florida Citizens.
It’s not just U.S. state and government institutions which have turned to cat bonds, some foreign government backed insurance entities have also tapped the capital markets for protection, including the Turkish Catastrophe Insurance Pool with Bosphorus 1 Re Ltd. and the Mexican Fund for Natural Disasters (FONDEN) with the MultiCat Mexico Ltd. transactions.
Christopher Grimes, Associate Director at Fitch Ratings, said; “Well-structured CAT bond deals are becoming a practical solution in the higher risk portions of sponsor reinsurance programs, which is expected to drive further issuance in 2014.”
Continued growth is expected in the U.S. as sponsors repeat their transactions, perhaps growing them to take advantage of market conditions. International sponsors are also expected to continue to tap the cat bond market with increasingly innovative and viable risk transfer alternatives.
Grimes notes that as windpools and other such insurance organisations are often being shrunk, there may be a limit to the number of potential sponsors in the U.S. now. He said; “The availability of potential sponsors in the U.S. will be moderated by the limited number of state wind pools and other publicly sponsored catastrophe insurance organizations now operating.”
There are three of these state and government backed sponsor cat bonds scheduled to mature in 2014 amounting to $1.1 billion of limit, including the $750m Everglades Re Ltd. (Series 2012-1), the largest cat bond ever issued. So we could see this limit renewed, perhaps even expanded with currently conducive market conditions.
Of course traditional reinsurers will be fighting hard to win back layers of these cat bonds, but the ILS investors are equally keen to secure more of the program for themselves, so it’s hard to forecast how much will go to cat bonds and how much to traditional reinsurance.
The activity from these organisation as sponsors of cat bonds has been on the increase, said Grimes. He explained; “Since 2001, $5.0 billion of state/government sponsored catastrophe bonds have been issued, with approximately 64% of those issued over the past two years. Approximately $1.5 billion of the bonds were issued in 2013, tripling the level of annual issuance that was experienced as recently as in 2011.”
Indemnity is clearly the structure of choice for U.S. based windpools and other state or government backed insurance organisations with well-modelled risks. However there is an opportunity for other triggers to help some organisations come to the cat bond market, as has been witnessed in recent years.
“70% of the $3.7 billion of outstanding issuances by state/government sponsors utilize an indemnity trigger. Over the last two years, the only deals that utilized parametric or modeled loss triggers were unique risks for the market with less historical modeling experience. They include Bosphorus 1 Re (Turkish earthquake), Multicat Re (Mexico earthquake/hurricane), MetroCat Re (Storm surge) and Golden State Re (Workers compensation),” stated Grimes.
Investor demand has been proven to be strong for risks from these organisations, both in the U.S. and beyond, in the last years issuance. While investor demand exists at these levels, and pricing in the cat bond market remains highly conducive to issuing new deals, we are likely to see strong renewals of state or government backed cat bonds and maybe even some new sponsors come to market in 2014.