Already Another Cat Bond RecordBy Tom Johansmeyer | May 1, 2014
The first month of the second quarter just ended, and we’re already looking at record catastrophe bond issuance activity. If all the announced transactions close in May, issuance will reach approximately $4.4 billion, exceeding last year’s record-setting first-half level by 12 percent. Together, the three most recent transactions — expected to close in May, according to the Artemis Deal Directory — will raise $2.3 billion in fresh capital. So far, issuance activity in the second quarter has reached $3.2 billion.
Consistent with a theme we’ve been tracking in our last few quarterly catastrophe bond market updates, the increasing size isn’t as interesting as the underlying market dynamics. Several features stand out:
1. Activity at the extremes: In January, three “cat bond lite” transactions were announced, with two revealed to use the PCS Catastrophe Loss Index. This month, sponsors announced the two largest transactions of the year to date. The latest Everglades Re catastrophe bond will provide $1.5 billion in protection to Citizens Property Insurance Corporation (CPIC), making it the largest catastrophe bond in the market’s history. In fact, it’s twice the size of the original Everglades Re transaction and tops the 2007 Merna Re issuance by 25 percent. The other large transaction is the most recent from Sanders Re, an index-triggered catastrophe bond that has reached $600 million.
2. Florida penetration: Sunshine Re and Armor Re, issued in May 2013, signaled to the market an increased likelihood that catastrophe bonds would begin to play a bigger role in June 1 renewals. Four Florida-focused catastrophe bonds have come to market thus far in 2014, including two from first-time sponsor Heritage Property and Casualty Insurance Company. American Coastal Insurance Company, a first-time sponsor in the second quarter of 2013, has also returned to the capital markets with another Armor Re this year.
3. PCS data use: Five of the 11 transactions announced this year use data from PCS (either as an index trigger or for catastrophe designation). Those bonds account for 40 percent of the announced issuance exposed to North American risk. Excluding catastrophe bonds from public entities (such as CPIC), PCS use reaches 64 percent. Two of the five catastrophe bonds that use PCS have indemnity triggers with catastrophe designation, an important trend we’re monitoring.
4. First-time sponsors: Four of this year’s 12 sponsors are first-time participants in the catastrophe bond market. In the second quarter, Everest Re announced its debut catastrophe bond, Kilimanjaro Re, which provides $450 million in protection and uses the PCS Catastrophe Loss Index. Riverfront Re, from the first quarter, is also an index-triggered catastrophe bond from a first-time sponsor.
5. Average transaction size: The average size of the issued bonds has surged almost 50 percent — from $229 million in the first half of 2013 to $336 million so far this year. If some smaller Florida transactions come to market in May, the average size may come down a bit. However, three of this year’s issuances are at or above $400 million, compared with four transactions of that size or larger in all of 2013. (Two of those closed in the first half of 2013.) Kilimanjaro Re, Sanders Re, and Everglades Re account for nearly $2.6 billion in capital raised.
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