Underlying diversity a hallmark of H1 2018 cat bond issuance

Catastrophe bond and insurance-linked securities (ILS) issuance in the first-half of 2018 covered an unprecedented level of Latin America risks, as transactions focused on North America declined by almost half year-on-year, according to Property Claim Services (PCS).

PCS’ H1 2018 catastrophe bond report highlights another very strong level of issuance in the marketplace, at approximately $7.4 billion, excluding any cat bond lite, private cat bonds, or deals focused on lines outside of property.

It’s worth noting that when including these types of capital market backed reinsurance deals, the level of issuance jumps to $9.39 billion, making it the second most active full-year ever, as shown by the Artemis Deal Directory.

But whichever figure is used, it’s clear that issuance in the first six months of 2018 was extremely strong even after the record-level of catastrophe losses and the record $12.6 billion of new risk capital brought to market in 2017.

PCS notes that H1 2018 issuance included a greater volume of underlying diversity than witnessed in the cat bond market in the past, with a wave of Latin America focused deals coming to market in Q1, while Q2 was more conventional.

According to PCS, $1.3 billion of catastrophe bond issuance in Q1 covered Latin America risks, which amounts to more than 15% of H1 2018’s total, and which includes the World Bank’s International Bank for Reconstruction and Development’s (IBRD) Capital At Risk notes (CAR), IBRD CAR 116 (Chile earthquake), IBRD CAR 117 (Colombia earthquake), IBRD CAR 118-119 (Mexico earthquake), and IBRD CAR 120 (Peru earthquake).

The Artemis Deal Directory shows that combined, the above deals actually total $1.36 billion of issuance, while a $5 million private deal covering Latin American property catastrophe risks, called Alpha Terra Validus II, takes the total of Q1 cat bond issuance focused on the region to $1.365 billion.

So, it’s clear that capital markets investors in reinsurance risks were treated to diversification in the opening six months of the year, with Latin American exposures making up for a decline in the volume of North America focused deals, which in turn led to a decline in the use of PCS data in H1 2018, when compared with the previous year.

According to PCS, in H1 2018 the number of transactions covering North America fell from 27 to 17, with seven of the 24 transactions covering risks outside of North America, and which totalled $2.6 billion. This includes the aforementioned Latin America deals, a Nakama Re Ltd. (Series 2018-1) deal from Zenkyoren, Mitsui Sumitomo Insurance’s Akibare Re Ltd. (Series 2018-1) deal, and Kizuna Re II Ltd. (Series 2018-1) from Tokio Marine & Nichido Fire Insurance, all of which provide cover against Japanese exposures.

Canadian issuance also featured in the first-half of 2018, with PCS noting that sponsors completed five transactions with coverage for the region, which is consistent with the previous year, and which amounted to $1.3 billion of issuance in the period.

This includes Kendall Re Ltd. (Series 2018-1) from Aspen Bermuda Limited, Kilimanjaro Re Ltd. (Series 2018-1) and (Series 2018-2) from Everest Re, Atlas Capital UK 2018 PLC (Series 2018 ISPV 1) from SCOR Global P&C SE, and Bowline Re Ltd. (Series 2018-1) from Transatlantic Reinsurance Co.

Use of PCS data in the first-half of 2018 fell from $4.5 billion and 12 transactions a year earlier to $2.1 billion across seven transactions, although PCS data was still used in more than 40% of North American H1 2018 issuance, as measured by capital raised.

PCS attributes the decline to the fact North American issuance declined by nearly half, year over year.

Discussing independent catastrophe designation, PCS notes that just two of the seven transactions using PCS in H1 2018 had indemnity triggers, compared with seven a year earlier.

$1.9 billion in new limit used PCS for independent catastrophe definition in the first-half of 2017, a figure that declined to $800 million in 2018, as a greater level of PCS activity came from the industry loss index approach, explains PCS.

It’s also worth noting that investors in the space were treated to some more unusual diversification in the first-half of the year, with a number of transactions that covered risks outside of the property arena, and as such are excluded from the PCS report.

As shown by the Artemis Deal Directory, this includes H1 2018 deals covering operational risks, mortgage insurance risks, medical benefit claims levels, and financial guarantee risks.

Issuance activity has remained brisk in the third-quarter so far, with cat bond deals to date in 2018 now adding up to $11 billion and the trend of diverse risks coming to market has also continued, with the first pure flood risk and California wildfire risk cat bonds.