2016 is expected to see a continuation of recent years strong catastrophe bond issuance, forecasts Fitch Ratings, with issuance conditions remaining favourable for sponsors, while investor appetite is expected to remain strong.
So, more of the same for the catastrophe bond and insurance-linked securities (ILS) market is anticipated, as cat bonds become an increasingly integral part of many insurance and reinsurance company risk transfer programmes.
At the same time the continued growth of interest in cat bonds as a risk transfer tool for corporations, as well as the expected growth of parametric triggers, are likely to stimulate further opportunities for growth of the market.
Investor appetite for access to catastrophe bonds remains strong, in fact it is likely as high as it has ever been. Institutional investors, such as pension funds or family offices, that Artemis speaks with express a strong desire for more cat bond issuance.
Many of these investors prefer the secondary liquidity and fully securitised nature of a cat bond issue. Of late, however, the ILS market has become heavily weighted towards collateralised reinsurance and while investors have accepted this, many investors (particularly pension funds) would prefer to see more of these risks coming to market in cat bond form.
That aside, Fitch Ratings says to expect another strong year of cat bond issuance in 2016, which will be welcome news for investors and managers in the ILS and cat bond sector.
Fitch counts a large number of maturities ahead before the end of 2016, seeing more than $7 billion over the next 15 months.
That compares to $5.718 billion that Artemis has listed in the Deal Directory as scheduled to mature next year, with $764m in Q4 2015, giving us $6.482 billion by end of 2016 (we’re not sure what the discrepancy is here as Fitch does not list the transactions).
For comparison, Artemis has recorded $6.853 billion of maturities to date in 2015, with $764m still to come in Q4.
This heavy maturity load ahead should ensure a good number of cat bond transactions are renewed by regular sponsors, although it is to be expected that price competition for these layers of risk will likely be high from traditional and collateralised reinsurance capacity providers.
But there is also an expectation that we will continue to see new sponsors come to market in 2016 as well, which should see a reasonable amount of brand new issues as well, which could more than account for any lost volume due to deals that do not renew in 2016.
Fitch Ratings notes; “Conditions remain favorable for new and returning sponsors; however, growth in total outstanding issuance will be limited as maturities offset much of the new issuance.”
That is true, outstanding growth is going to be slow over the coming years due to high levels of scheduled maturities, unless something causes a significant increase in catastrophe bond issuance.
Factors that could cause an increase in issuance include: new of changed regulatory regimes, such as Solvency II, resulting in a greater requirement for high credit quality risk transfer; higher investor demand; increased efficiency in issuance reducing frictional costs; growth into new or emerging markets and risks; and continued expansion into corporate risk transfer.
In 2015 to-date it has been repeat sponsors that have driven much of the issuance volume, Fitch notes.
“Repeat sponsors have replaced maturing issues and taken advantage of current favorable market conditions, but new sponsor issuance has been limited as other alternative risk transfer outlets have remained strong options for cedants,” the rating agency said.
However, it should be remembered that year-to-date issuance of catastrophe bonds is only second to 2014, the record year, and that largely due to the huge Everglades Re deal.
Looking ahead to the rest of 2015, Fitch explains; “Over the prior 10 years, the individual fourth-quarter periods experienced a significant amount of issuance as the North Atlantic hurricane seasons draw to a close. Current conditions are expected to remain in place and for fourth-quarter 2015 issuance to match prior-year levels.
“Future growth in the cat bond market is also predicated on outstanding transactions that have upcoming maturities. If the sponsors of those transactions decide to come back to the capital markets for reinsurance protection through cat bonds, there could be significant new issuance in the near term.”
Interestingly, discussions with brokers suggest that the Q4 pipeline is currently not perhaps as strong as they would have hoped, however strong enough to outpace maturities and get the market back to outright growth by the end of the year.
It will be interesting to see what comes to market towards year-end, in time for the January reinsurance renewal and whether they complete in 2015 or slip into 2016, as this could affect the final year total.
Artemis’ Q3 2015 Catastrophe Bond & ILS Market Report – A market making steady progress
We’ve now published our Q3 2015 catastrophe bond & ILS market report.
This report reviews the catastrophe bond and insurance-linked securities (ILS) market at the end of the third-quarter of 2015, looking at the $1.093 billion of new risk capital issued and the composition of the cat bond & ILS transactions completed during Q3 2015.