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While 2012 catastrophe bond issuance was high it still didn’t satisfy investor demand: Willis


The latest report on the 2012 catastrophe bond and insurance-linked securities market arrived with us this morning from Willis Capital Markets & Advisory (WCMA), the division of global insurance broker Willis which deals with cat bond structures and capital market risk transfer products. The report says that while 2012 was a great year for primary issuance of catastrophe bonds, the volume coming to market was insufficient to satisfy strong demand from investors.

The second highest year of catastrophe bond issuance on record is a signal of the strong growth in the ILS market, says the report from WCMA. By the year-end WCMA counted $5.9 billion of natural catastrophe bonds issued, a lower number than our Deal Directory’s total of just under $6.3 billion as that includes mortality, health and private cat bond deals and Willis only counts natural catastrophe bonds in its reports.

The $5.9 billion is a 37% increase over 2011’s issuance according to WCMA, who recorded $4.9 billion of issuance in 2011, a healthy jump and a signal that the market is growing according to the broker.

The fourth quarter of 2012 saw issuance equivalent to the same period a year before, with $1.9 billion of cat bond deals coming to market. Q4 2012’s capacity was issued in seven transactions, compared to nine in Q4 2011, so while the total cat bond volume issued was identical the market was actually busier the year before.

The chart below from Willis’ report clearly shows the outstanding 1st and 2nd quarters to 2012 but the average 3rd and 4th quarters perhaps held the market back from breaking its issuance record last year.

Non-Life Cat Bond Issuance by Quarter (2008 – 2012)

Non-Life Cat Bond Issuance by Quarter (2008 – 2012) - Source: Willis Capital Markets & Advisory

While the cat bond market continued to see new capital inflows from investors during the final quarter of 2012, primary issuance was not sufficient to satisfy investor demand, which WCMA said triggered a bidding war on some bonds. This likely helped to keep pricing low and also contributed to the upsizing seen in recent deals.

Bill Dubinsky, Head of ILS at WCMA, commented; “Most ILS investors were hoping that early December would be full of new issuances as it had been historically. However they were disappointed to have fewer bonds than necessary to meet their cash inflows. We believe investors will anxiously welcome the new issuances that are in the pipeline.”

That bodes well for those sponsors considering bringing cat bonds to market in this first quarter of 2013, as abundant investor capital will be available to assist new transactions in achieving attractive pricing and increasing in size, if that supports the sponsors goals.

The market reached a record size, according to WCMA’s numbers, at the end of 2012 with $15.2 billion of outstanding natural catastrophe bonds in the market. On WCMA’s figures this is $1.1 billion larger than the cat bond market was at the end of the record issuance year of 2007 and $2.5 billion larger than the market size at the end of 2011.

2012 saw the capital markets increase its support for excess of loss natural catastrophe risk, with capital being put to work by investors in both cat bonds and collateralized reinsurance vehicles. Both products emerged as big winners by the end of the year, according to WCMA.

WCMA sees no sign that this growth will slow down in 2013, with investors such as pension funds, endowments and life insurers all continuing to look to alternative investments, especially those which outperformed the financial crisis. WCMA expects to see more capital come into the catastrophe risk space, in both the cat bond market and the collateralized reinsurance space and industry loss warranties (ILWs).

Demand for these products continues to grow, and WCMA notes the diversification attraction that ceding companies find in tapping capital markets investors as a new source of re/insurance capacity. WCMA notes that this is in addition to third-party capital inflows to reinsurers in sidecars and similar reinsurance vehicles.

WCMA makes a very good point about the comparison of cat bond cover to collateralized reinsurance cover, that these instruments largely transfer the same risks, to the same investors for the benefit of the same cedents and using the same intermediaries. So the decision between the products lies in issues such as multi-year versus single year cover, speed of execution, lower ongoing costs for cat bonds, greater liquidity, flexibility and lower upfront costs for collateralized contracts.

In essence WCMA seem to be saying that it sees growth potential in both and that the instruments both provide valuable risk transfer and investment opportunities.

WCMA makes a tentative prediction for $6 billion to $7 billion of cat bond issuance in 2013. This is inline with other market intermediaries. WCMA notes however that if investment grade cat bonds made a return to the market there could be a much higher level of issuance. WCMA sees private cat bonds as another area of potential growth.

WCMA also sees growth in collateralized reinsurance and ILWs and says that we will likely see “an explosion in third-party capital interest by reinsurers and asset managers”, something already becoming evident in recent months with all the third-party asset management efforts being launched. WCMA also sees product development moving beyond catastrophe risk, but notes that regulatory hurdles slow these innovations down.

All in all a very positive market report from Willis Capital Markets & Advisory. You will soon be able to access a full copy of the report from WCMA via the Willis website here.

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