The size of the outstanding catastrophe bond market is something that everyone puts a different number on depending on whether they are talking non-life only, or perhaps they include health and longevity and whether they include some additional unrated transactions. One source who are consistent is broker Willis‘ capital markets division, Willis Capital Markets & Advisory, who staunchly stick to non-life catastrophe bond issuances when they quote numbers on the markets size.
In a blog post published yesterday on their WillisWire website, Adam Beatty of Willis Capital Markets & Advisory discusses the size of the outstanding non-life catastrophe bond market and says that it is now close to an all time high as it has cleared the $14 billion mark for the first time since June 2008.
The chart below, taken from their blog post, shows the amount of non-life catastrophe bond capacity outstanding at the 31st May each year. The outstanding non-life cat bond market is now at its second highest point ever on Willis’ numbers and given a lower amount of cat bond maturities to come over the remainder of 2012, particularly Q3, could reach an all time high point by year-end if issuance remains steady.
The blog post from Adam Beatty of WCMA goes on to discuss the potential for the market to achieve consecutive years of outstanding growth, as it did from 2004 – 2007. He explains that WCMA expect to see a more gradual growth in both issuance and the outstanding size of the non-life cat bond market due to an increasing demand for peak natural catastrophe reinsurance cover and because they expect capital market investors to assume an increasing amount of this business over time.
The post continues to say that it is logical for peak risks to be transferred into the capital markets, an opinion we hold too as the capital markets are likely the only long-term source of capital sufficiently large enough to accommodate the real peak catastrophe risks. However Adam Beatty says that the timing of this move to more capital market participation in catastrophe reinsurance is dependent on reinsurance pricing and the relative attractiveness of catastrophe bonds at any one point in time.
The article goes on to discuss recent pricing trends and WCMA are of the opinion that some potential cat bond sponsors may have been deterred from issuing deals due to the pricing in the market, given that cat bond spreads have risen more quickly than reinsurance price increases. They put this down to an agnosticism from investors who will plough capital wherever they feel they can make the best returns in the catastrophe reinsurance space, be that collateralized retro, industry loss warranties (ILWs) or catastrophe bonds.
The article concludes by saying that WCMA believe that the medium term outlook for the catastrophe bond market remains encouraging. They say that capital inflows to the catastrophe risk space remain strong and they expect investors to continue to support cat bonds alongside other forms of collateralized reinsurance covers. Growth in peak insured exposures will also drive continued participation of the capital markets in catastrophe risk and cat bonds are likely to be one instrument that benefits from this.