5 Cat Bond Market Milestones in 2012

By Rob Newbold  |  October 16, 2012

This year may be one of the most active in the history of the catastrophe bond market, but the headline issuance number is just the first noteworthy aspect. The sector has reached several major milestones in 2012, all of which point to the future health — and growth — of this form of risk transfer.

The five major highlights of the 2012 catastrophe bond market so far — aside from total capital raised — are:

1. Securitization of risks in Japan: Kibou Ltd. was the first cat bond issued to cover risks in Japan since the devastating Tohoku earthquake last year.

2. Largest single-tranche deal in cat bond history: Citizens Property Insurance Corporation, Florida's state-run insurer of last resort, sponsored Everglades Re, a single-tranche transaction that raised $750 million in fresh capital. It is also the second-largest cat bond ever completed, behind Merna Re ($1.1 billion in the second quarter of 2007).

3. New issuance ahead of expiring bonds: For the first time since the global financial crisis in 2008, new issuance (which totals $4.1 billion so far) outpaced expirations.

4. Trigger diversity: This year has seen a diversification in cat bond structures  with a variety of trigger types, including indemnity, industry loss (including the PCS Catastrophe Loss Index), modeled industry loss, modeled loss, and parametric trigger mechanisms.

5. A new arrival: On the subject of trigger diversity, Ibis Re II was the first cat bond to use the new Verisk Catastrophe Index™. The index provides county-level industry loss estimates by line of business for hurricanes and earthquakes affecting the United States. Its high resolution allows companies to reduce the basis risk of various insurance risk transfer mechanisms. Basis risk is the discrepancy between a bond’s payout for a covered event and the payout under an indemnity trigger, and it is ever on bond sponsors’ minds.