As we reported last week here, according to insight from Willis Capital Markets & Advisory (WCMA) the strong levels of primary catastrophe bond issuance in 2012 has now taken the cat bond market to an all time high in terms of size. That was one of the key insights from their recently published Q3 2012 ILS market report. In our final look at some of the data points from WCMA we wanted to draw your attention to their charts showing the risk premium and expected loss of cat bond primary issuance.
We covered these charts at the end of Q2 here so felt it worth looking again. WCMA break the market into U.S. wind exposed and non-U.S. wind exposed cat bonds and the numbers look at the last twelve months rolling issuance and give a single number of the average risk premium and the average expected loss over that time.
At the end of Q3 there is no change to the U.S. wind exposed side of the market, as that quarter is typically quiet for new U.S. hurricane exposed issuance. So the averages at the moment remain slightly skewed by the unusually large Everglades Re cat bond in April which had a high risk premium attached to it.
It’s going to be interesting to see which way this U.S. wind exposed chart goes as more hurricane exposure flows into the cat bond market during Q4 and early next year. With hurricane Sandy still playing out, and potentially going to impact some cat bonds, that could affect the risk premium that investors demand for a certain level of expected loss and could help to keep the average risk premium a little higher than would be expected. The weighted average risk premium and expected loss for hurricane exposed cat bonds at the end of Q3 2012 has not moved from the end of Q2, staying at 12% and 2.4% respectively
For non-U.S. wind exposed cat bond average risk premiums and expected losses the picture is quite different. This chart has been affected because the numbers show the rolling twelve month average and a number of deals have no dropped off which has caused the averages to drop significantly. The weighted average risk premium for non-hurricane risk has dropped to 4.9%, while the weighted average expected loss for those cat bonds has reduced to 1.2%. WCMA explain that there was a lot of issuance of high expected loss non-hurricane risk in Q3 2011, which has now dropped out of their numbers. We do wonder whether the recent trend for a cheapening of European windstorm risk, with cat bonds paying lower risk premiums, has also affected this chart a little. The numbers here show that expected losses have reduced by quite a lot, we wonder how long capital market investors will be attracted to risk at that level or whether the traditional reinsurance markets might begin to be seen as more suitable.
It will be interesting to see where these graphs go over the next few months as they should begin to show the tightening of spreads that has been experienced in recent new issues. That spread tightening has enabled sponsors to secure coverage at better rates in recent deals and it’s expected to be a trend that continues for most deals through Q4. We’ll update you next time WCMA publish these charts.
The charts are taken from the recently published Q3 2012 ILS market report from Willis Capital Markets & Advisory, which you can read more about here.