Standard & Poor’s Ratings Services provided the ratings on $5.16 billion of catastrophe bond issuance in 2013, including medical benefit payments linked and mortality bond transactions, up on the $4.8 billion rated in 2012.
The $5.16 billion of cat bonds rated in 2013 was approximately 68% of total cat bond market issuance during the year, according to S&P. The figure is second only to, and only slightly below, the record $6.1 billion of S&P rated cat bonds in 2007.
In 2010, 2011, and 2012 S&P rated $4.3 billion, $3.8 billion, and $4.8 billion, of catastrophe bond issuance respectively. The increase to $5.16 billion in 2013 is indicative of a growing market, with more issues available for rating.
S&P remains the dominant provider of credit ratings to cat bonds and ILS issuers, however, the percentage of deals rated has decreased a little, as in 2012 S&P rated nearer to 75% of cat bond issuance. This is due to the increased number of catastrophe bond transactions which do not seek a rating at issuance, demonstrating investors increasing acceptance of unrated cat bond paper.
2013 saw S&P rate cat bonds by five new sponsors to the market, American Coastal Insurance Co., Axis Specialty Ltd., the Metropolitan Transportation Authority of New York, QBE Insurance Group Ltd., and Renaissance Reinsurance Ltd. It also saw the first storm surge cat bond rated, MetroCat Re from the New York MTA.
S&P said that covered exposures in the catastrophe bond market expanded in 2013 and unmodelled risks were more prevalent.
The rating agency highlighted the example of AIG’s Tradewynd Re cat bonds.It said that the Tradewynd deals brought risks such as such as damages to airplanes, marine and inland marine cargo, and onshore oil rigs, as well as clean-up costs from pollution caused by covered perils, all of which were not included in the risk modeling, to the cat bond market. It noted that due to the composition of the covered business it did not anticipate the contribution to expected losses was significant and adjusted the modelled results to account for it.
On trends witnessed in the market in 2013, Standard & Poor’s credit analyst Gary Martucci commented on pricing; “Typically, we see interest spreads at 3x-4x of expected loss, however, the final deal we rated this year, VenTerra Re Ltd., priced at 2.76x of expected loss. Our general view is that, while pricing may not drop much further, it will not likely increase either.”
Martucci continued, discussing the evolving cat bond terms and conditions which provide greater flexibility to sponsors. He said; “One change we saw in 2013 was the variable reset. Usually, the probability of attachment and the expected loss reset to maintain their initial percentages established at closing. This past year, we saw some deals permit these percentages to fluctuate within certain parameters. Based on the reset percentages, the interest spread paid to bond holders would also fluctuate. From a rating perspective, if the probability of attachment can increase from its initial level, except for the final reset, we would look to the highest permitted reset probability of attachment as the basis for assigning the rating.”
The mix of triggers in the market has also changed, said Martucci, with indemnity trigger usage increasing its share of issuance. Martucci explained; “Based on the notional amount, 48.4% of issuance has an indemnity trigger and 33.1% an industry loss trigger; 11.6% have a parametric trigger and 6.9% have either a modeled loss or combination of modeled loss and industry loss triggers.”
Martucci noted that in the past investors seemed to prefer parametric or industry loss triggers, but that indemnity is now becoming more accepted. “The shift to indemnified triggers seems to indicate that investors are becoming more knowledgeable of risks, and the influx of capital into this market is giving issuers greater influence in structuring bonds,” he commented.
On the topic of the prospects for issuance in the year ahead, Martucci would not be drawn but commented; “As for issuance in 2014, at Standard & Poor’s Insurance Hot Topics Seminar on Jan. 14, 2014, two panelists, Jay Green of GC Securities and John Seo of Fermat Capital, indicated that it could be a record year for issuance.”
Standard & Poor’s recently published an updated criteria for rating natural peril catastrophe bonds. The updated criteria did not change any S&P ratings on outstanding cat bonds, though it did update certain benchmarks such as partial-year risk periods, variable resets, and data needed when named storms and coupon step-downs comprise the covered peril.
You can find the details of every catastrophe bond issued in 2013, including all those rated by S&P and more, in the Artemis Deal Directory.
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