S&P rates $3.55 billion of catastrophe bonds so far in 2013

Standard & Poor’s Ratings Services has been responsible for the rating of $3.55 billion worth of natural catastrophe bonds so far this year, more than it had rated in the first seven months of the previous three years. The same period in 2010, 2011, and 2012 saw S&P rate $2.1 billion, $1.6 billion, and $3.3 billion respectively.

As regular readers will be fully aware, catastrophe bond issuance in 2013 has been running at or close to record levels. Forecasts for full-year issuance now suggest that we will see more than $7 billion of cat bonds issued in 2013, with a chance it could reach $8 billion. S&P noted that 2013 issuance that it rated is already approaching the full-year totals for 2010, 2011, and 2012 when it rated $4.3 billion, $3.8 billion, and $4.8 billion, respectively.

Demonstrating the increasing attraction that catastrophe bonds hold for insurers and reinsurers looking to transfer risk, S&P rated deals from five new sponsors in 2013 so far. American Coastal Insurance Co. (Armor Re Ltd.), the Turkish Catastrophe Insurance Pool (Bosphorus 1 Re Ltd.) the first Turkish earthquake cat bond since 2007, the Metropolitan Transportation Authority (MetroCat Re Ltd.) the first catastrophe bond with a parametric trigger tied to storm surge risks, Renaissance Reinsurance Ltd. (Mona Lisa Re Ltd.), and Axis Specialty Ltd. (Northshore Re Ltd.).

S&P also saw some new structural features in the deals it rated, some of which are catastrophe bond market firsts showing the continuing evolution of the market to support sponsors needs. Some of these features which provide sponsors with increased flexibility include longer maturities, the inclusion of some unmodeled risks, early call provisions and variable reset mechanisms.

S&P has observed the tightening of catastrophe bond pricing, which we’ve discussed at length this year. It has seen the multiple, of interest spread to expected loss, drop significantly from the 6 to 8 times down to 3 to 4.5 times in many deals in 2013. Further, S&P notes that some cat bond transaction interest spreads, which are akin to the premium, are now cheaper than traditional reinsurance pricing, with the influx of capital into insurance-linked securities (ILS) from investors a key reason.

Hurricane risk remains the dominant peril in the catastrophe bonds S&P rated, with only two bonds not exposed to it. S&P notes however that the definition for U.S. wind has changed from hurricanes to now be classified as ‘named storms’. This now includes any event which receives a name, so factoring in storms like superstorm Sandy which became extra-tropical or any other named tropical cyclone which never becomes a hurricane. This broadens the coverage for sponsors.

S&P note that this change in definition will likely have more of an effect on aggregate cat bonds, rather than per-occurrence, as storms that don’t reach hurricane strength can now qualify and could begin to erode the aggregate protection, when they wouldn’t have reached the trigger for a per-occurrence cat bond deal.

You can see the mix of perils in the catastrophe bonds rated by S&P in the graphic below:

Issuance amount by peril in S&P rated catastrophe bonds from 2013

Standard & Poor’s remains the dominant rating agency for catastrophe bond issuances, having rated the vast majority of transactions issued this year. However, with more deals now coming to market without a rating, something we expect to see increase as sponsors seek to keep costs down, investors become more accepting of unrated deals and cat bond usage spreads, the percentage of cat bonds which are rated compared to those issued may see a slow decline.