Standard & Poor’s structured finance research team recently held a number of topical roundtable events where they invited leading participants from a sector to sit together, answer S&P’s questions and discuss the state of their market and the outlook for the next year. The first of these roundtables that we’ll cover is on the topic of catastrophe bonds. The resulting publication is available from the S&P website here for those who subscribe to the S&P Global Credit Portal.
The participants in the roundtable included Brian Tobben of PartnerRe, Brett Houghton of Fermat Capital, Patti Guatteri of Swiss Re Capital Markets, Niraj Patel of Genworth Financial and Brent Poliquin of AIR Worldwide. All of the participants agreed that despite continuing economic and financial market uncertainty and volatile investment markets, they expect to see a robust pipeline of new catastrophe bond issuance in 2012 with several of them expecting the market to surpass the volume of issuance seen in 2011.
S&P began by asking the participants about RMS hurricane model update and how it impacted the cat bond market. Interestingly they all implied that it hadn’t really changed the way that they do business as they mostly rely on multiple models anyway. They said there was a chance of it increasing issuance in the future in line with the heightened view of the risks for that peril, but that had yet to happen (no issuance has used the RMS model since the new version was launched). They mostly agreed that a multi-model view of cat bonds would be a good thing but interestingly said that using a standardised set of scenarios or historical events would make it easier to compare the risk of different transactions.
Brett Houghton of ILS investment specialist Fermat Capital went so far as to say that it wouldn’t surprise him to see some deals come to market without any modeling expertise in certain circumstances. That would certainly make issuance a little cheaper in some cases and we can see how that might be possible for well understood risks and transparent deal terms or where it is a case of an event almost certainly resulting in default. An interesting proposition for the market though.
Next the group moved on to discuss the Mariah Re default. All participants thought there was a future for severe thunderstorm and tornado risk in the cat bond market and acknowledged the severe season that had caused the Mariah Re defaults. They said their may be a pricing issue that needs to be resolved, meaning prices should/will widen for this peril, and that structurally the recent Mariah Re bonds may not have been the best design, however the severity of the losses experienced in 2011 were unique. The severe thunderstorm season will also lead others to acknowledge the risk this peril poses which should naturally lead to cat bond issuance if the structure can be tweaked to become a little more robust.
Neither the Mariah Re losses or the European sovereign debt crisis have impacted trading in the cat bond secondary markets according to the participants. In fact the market reacted in a liquid fashion after the cat bond losses during 2011. The European financial markets crisis could impact the market but only if it becomes so severe that investors need to retrieve cash from various positions, as happened in 2008.
On pricing of cat bonds for 2012 they all agreed that some price widening was likely with some evidence of this in the deals which came to market during December. They don’t expect anything dramatic while issuance keeps flowing but if capacity dries up price changes could kick in.
S&P asked the participants whether they felt there would be more private cat bond transactions in 2012 and whether this was likely to become a larger proportion of the market as a whole. Interestingly while they felt there is a place for private cat bond deals none of the them felt this area would grow significantly and most said that the 144A market was the best chance for robust cat bond market growth.
On the outlook for 2012 the participants all agreed that issuance would either be equal to 2011 or slightly higher. All are optimistic and see a good year ahead for the cat bond market and the largest issuance volume prediction was for $6 billion in transactions during 2012. They see some opportunity for new risks to come to market and would welcome more diversification in the marketplace, an increasing trend towards aggregate covers should benefit the cat bond sector too and there is also the potential for issuers to begin to respond to the needs for greater capital requirements due to the new risk models and the impending Solvency II legislation. Overall the participants have a very positive outlook for the catastrophe bond market in 2012.
You can purchase the full document or access it if you are a subscriber to S&P’s services here.