Trends suggest growth despite $6bn+ of cat bond maturities in 2016

Data from the Artemis Deal Directory reveals that roughly $6.08 billion worth of cat bonds are scheduled to mature in 2016, but with investor appetite and sponsor sophistication growing, there is every chance the market will continue to experience outright growth by year-end.

Following on from the record-breaking issuance volume of cat bond and ILS deals witnessed in 2014, at $9.094 billion, 2015 was another solid year for the sector, with $7.898 billion of issuance outstripping maturities for the year, resulting in outright market growth of $681 million.

While this is significantly lower than the market growth recorded in 2014, a year which had just $4.404 billion of maturities and more than $9 billion of issuance, resulting in outright market growth of a staggering $4.69 billion, the outstanding cat bond and ILS market at December 31^st 2015 was actually the highest ever recorded by the Artemis Deal Directory, at $25.960 billion.

And now, with more than $6 billion worth of cat bond and ILS transactions scheduled to mature during the coming months, a figure that could rise should any smaller, typically private transactions come to market with a six-month duration for example (as seen with certain deals issued under the Dodeka platform), the recent strong levels of market activity will be required to ensure outright market growth is achieved once more.

Reinsurance giant Swiss Re in its recent ILS market update report, notes that in the first half of 2016 alone nearly $4 billion of maturities are expected. This is roughly $500 million of maturities less than recorded by the Artemis Deal Directory, something that is likely attributable to the inclusion of private deals.

“This trend of large maturities is a result of the uptick in issuance which began in 2012 and should become the new normal as long as the market continues on its current trajectory and bonds maintain approximately 3-year terms,” explains Swiss Re.

Underlining Swiss Re’s notion is the fact that in 2017, and again according to data from the Artemis Deal Directory, a significant $8.02 billion of deals are set to mature, including the $1.5 billion Everglades Re deal from Citizens Property Insurance, the largest ever cat bond.

Everglades Re Ltd. 2014-1 was issued during 2014 and was a key reason the market recorded its highest ever volume of issuance in terms of capital during the period, and, owing to its 3-year duration that is now fairly typical of cat bonds, is also the reason 2017 will experience more maturities than any other year on record, based on current issuance levels.

And of course, should any more deals come to market during 2016 with a single year duration, it’s highly possible the figure could rise from the current $8.02 billion.

Upcoming catastrophe bond maturities by half-year and year, 2016 to 2018 (Data from the Artemis Deal Directory)

“Though we do anticipate a healthy pipeline of new deals to come in 1H 2016, it would be fair to wonder if there will be some contraction in the size of the overall market by the mid-point of this year (similar to what was experienced in 2015) as the trend of large maturities will continue,” says Swiss Re.

Roughly $5.2 billion worth of deals were issued during the first-half of 2015, while some $5.79 billion of deals matured, meaning that according to the Artemis Deal Directory the overall market size contracted by roughly $590 million, which is a similar trend that Swiss Re expects to see come mid-year 2016.

However, a lower volume of deals maturing and strong issuance in the second-half of the year, particularly in December when more than $1.3 billion of deals were brought to market, ensured that issuance outstripped maturities come year-end, and the market grew by $681 million.

Owing to the uptick in issuance in recent times and the fact that as in 2015 and 2014 the majority of maturities due this year take place in H1, a continuation of the issuance trend witnessed in the final two quarters of the year since 2010 (average combined Q3 & Q4 issuance of last five years is approximately $2.91 billion) would likely ensure outright market growth is again achieved during 2016.

That being said, it’s important issuance levels remains strong during the first-half of 2016, as while a slight contraction of overall cat bond and ILS market size wouldn’t be too surprising at mid-year, were issuance to fall too far behind the $4.52 billion of scheduled maturities (average $4.25 billion of issuance in H1 over last five years), it would make outright market growth that much more difficult to secure come the end of December.