Reinsurance firm Swiss Re’s latest insurance-linked securities (ILS) market update highlights the amazing start to 2014, with the highest level of catastrophe bond issuance ever recorded and a market breaking more records than Germany’s World Cup star Miroslav Klose.
In the first-half of 2014 Swiss Re Capital Markets recorded $5.9 billion of new ILS and catastrophe bond issuance, with $4.49 billion issued in the second-quarter alone. Both of these are records, breaking the H1 issuance record set in 2007 and taking the ILS and cat bond markets outstanding size to a new record level of $22 billion (up 10% from the $20 billion recorded at the end of 2013), again on Swiss Re’s number.
Swiss Re does not include every transaction that Artemis tracks, focusing on the 144A cat bond issues and not the private cat bond or cat bond lites. Hence Artemis’ numbers are a little higher, at $4.634 billion for Q2 2014 and $6.219 billion (also detailing the many records broken so far this year) for the first-half of this year and an outstanding ILS & cat bond market size of just over $23 billion.
The pace of new catastrophe bond issuance intensified from March onwards, notes Swiss Re, driven by strong investor demand and a continued absence of large catastrophic events. These features, as well as the highly competitive and well-capitalised influence of traditional reinsurance firms, contributed to a continued decline in cat bond spreads which were forced to new lows.
Unsurprisingly, investors have not been cheering on the new low spreads but they ultimately accepted the deals, perhaps learning a new appreciation of what lower-cost capital really represents, which Swiss Re says leads it to believe that the current low-levels of cat bond spread are sustainable.
However, given the significant push-back from investors Swiss Re said that it does appear that the market has achieved a floor on pricing, although the reinsurer does not expect significant spread widening as deals are still upsizing and being oversubscribed at the current pricing levels.
Swiss Re said that this shows investors continued appreciation for the ILS asset class and the relative value of ILS and catastrophe bonds to a portfolio. The uncorrelated nature of ILS continues to be attractive and Swiss Re’s comments reflect the strong appetite being seen across the market still.
Favorable market conditions due to a number of factors should continue to spur on this interest from ILS investors, Swiss Re said in the report, as well as the asset class’ continued maturation and development.
The increased demand and sophistication levels of ILS investors has allowed sponsors to issue cat bonds providing more holistic cover, that more closely resembles traditional catastrophe reinsurance. As a result, ultimate net loss (UNL) triggers and aggregate protection are becoming more frequent. This, as well as the continued favorable pricing, has encouraged new issuers to enter the market, including more regional sponsoring insurers, Swiss Re explained.
There was a healthy mix of both repeat and new ILS sponsors in the first-half of 2014, with both showing their appreciation for the diversified source of reinsurance capital. In the last year and a half 15 new issuers have accessed the ILS and cat bond market, with 8 of those coming in the first-half of 2014, the report details.
Swiss Re notes that only $300m of cat bonds and ILS are scheduled to mature by the end of 2014, so the market should continue to see outright growth and reach new highs. Swiss Re suggests that it expects full-year 2014 issuance will beat the high last seen in 2007.
The report highlights a feature of the market which Swiss Re calls ‘structural convergence’. By this the reinsurer means that we are now beyond the price convergence, that has been a key topic of discussion for the last few year and that we are now seeing structures and coverage terms converge between ILS and traditional reinsurance.
This structural convergence is most evident in the move from index triggers towards a more indemnity trigger based cat bond market, said Swiss Re. In 2014, Swiss Re counts 75% of issuance so far as being indemnity based, up from 55% in 2013.
This increased shift to indemnity protection does have a lot to do with the types of sponsors and also market conditions. With many primary insurers tapping the cat bond market in 2014 the use of indemnity protection was inevitable. Also the pricing and competition, between ILS and traditional reinsurance, has led to an increased use of terms to match the coverages.
Aggregate coverage has, as a result, also increased in prevalence, Swiss Re notes. Also, as investor sophistication has increased, more unmodelled risk has been accepted by the market, while on the other side the traditional reinsurance market has become more accepting of multi-year covers in order to remain competitive.
With spreads on catastrophe bonds lower the gap between the return of cat bonds and corporate bonds has narrowed, said Swiss Re, but the relative value remains as cat bonds rated BB continue to return more than high-yield bonds of the same rating. However the difference has declined, as the spread between the two has come down from 1.84 points at the start of 2014 to 1.52 points at the end of June.
The ILS market has been through a period of rapid growth, resulting in the 12 consecutive month issuance figure passing the $10 billion mark during Q2 2014 for the first time. Swiss Re’s report highlights the continued convergence between ILS and traditional reinsurance, now on structural terms as pricing has already converged, this matching of terms should help to continue the markets growth.
You can download Swiss Re’s latest ILS market report here (PDF format).
Artemis’ Q2 2014 Catastrophe Bond & ILS Market Report – The Biggest Quarter, The Biggest Catastrophe Bond
We’ve now published our Q2 2014 catastrophe bond & ILS market report.
This report reviews the catastrophe bond and insurance-linked securities (ILS) market at the end of the record second-quarter of 2014, looking at the new risk capital issued and the composition of the transactions completed during Q1 2014.