Catastrophe Bond Market Trend Watch

By Gary Kerney April 9, 2013

This year’s catastrophe bond market began with a strong first quarter. Sponsors raised nearly $900 million, making it one of the three most active first quarters in the history of the catastrophe bond market. Many expect 2013 to be comparable to 2012 — and possibly even to 2007. To learn more, download our latest catastrophe bond market update, PCS First-Quarter 2013 Catastrophe Bond Report: Another Big Deal.

In many ways, the first quarter of 2013 shows a continuation of the momentum from last year. Let’s take a look at the trends Property Claim Services® (PCS®), a division of Verisk Analytics, identified at the end of 2012 and how they manifested in the first quarter of this year.


 

 

 

 

 

 

 

1. A big first quarter

From our last catastrophe bond market update: In the first quarter of 2012, $1.3 billion came to market, up 18 percent year over year. With the bar set even higher for 2013, it seems that a strong start would be necessary for the 2012 momentum to continue.

First-quarter assessment: Momentum from 2012 clearly carried forward, with the first quarter of this year among the most active in the history of the catastrophe bond market. When you include the second Caelus Re issuance of the year and Tar Heel Re, announced in March and expected to close in April, the result is approximately $1.7 billion in issuance activity. Those two transactions upsized and declined in price as a result of investor demand, further emphasizing the continuation of last year’s momentum. With that in mind, and hurricane season right around the corner, the prospect of a strong 2013 remains likely.

2. Publicly managed entities

From our last catastrophe bond market update: While Pelican Re provides only one year of cover, Everglades Re has a two-year tenor. The California Earthquake Authority’s two Embarcadero Re bonds have tenors of three years. Last year was the CEA’s second year in the catastrophe bond market, and it was the first for Citizens Property Insurance Corporation (CPIC) and Louisiana Citizens. Those three entities together raised more than $1.3 billion through catastrophe bonds in 2012. Whether they plan to return to the capital markets in 2013 remains to be seen. If they do, the effect on issuance levels could be substantial.

First-quarter assessment: CPIC returned to the capital markets the first quarter, following last year’s $750 million Everglades Re transaction, the second largest in the history of the catastrophe bond market (and the largest single-tranche deal). This time, CPIC is seeking $250 million in capital, slightly above the 2012 average deal size. Additionally, Pelican Re is reportedly open to another catastrophe bond transaction this year, depending on pricing. Given that CPIC completed its latest Everglades Re deal at a lower cost and with a higher risk profile, the prospect of another Pelican Re seems likely.

3. Investor needs

From our last catastrophe bond market update: The prevailing low interest rates have made catastrophe bond yields particularly attractive to investors. Even if broader financial market conditions change, though, many believe that investor interest in catastrophe bonds will continue, as they do not correlate with broader financial markets. 

First-quarter assessment: Demand for catastrophe-linked investment risk remains high, and we will have to wait to see whether the ILS market can grow enough to meet it. For now, some investors are having trouble deploying their capital, and the long-term effects of this lack of opportunity on investor interest in the sector remain to be seen.

4. The January reinsurance renewal

From our last catastrophe bond market update: Some sponsors have shown that they will return to the capital markets even when reinsurance rates are favorable. If Hurricane Sandy affects the renewal, it could influence carrier appetites for capital market capacity. At the same time, the exposure of outstanding catastrophe bonds to areas affected by the storm could affect future issuance. 

First-quarter assessment: Property catastrophe reinsurance rates did not change dramatically for loss-free programs at the January 1, 2013, reinsurance renewal, largely because of the capacity available to the market. Therefore, the availability of traditional risk-transfer methods should balance demand for capacity in the capital markets.

5. Cost of catastrophe bond capital

From our last catastrophe bond market update: Innovation in the catastrophe bond market has lowered frictional costs significantly over the past decade. If the trend continues, catastrophe bond capital may become accessible to smaller insurers. 

First-quarter assessment: While larger transactions continued to be the norm, the completion of the Skyline Re deal indicates that sponsors are interested in smaller catastrophe bonds, as well — and that investors are willing to participate in such deals. Sponsor interest in smaller transactions will depend on several factors, including a reduction in frictional costs. PCS has demonstrated its commitment to reducing those costs. With larger sponsors discussing smaller transactions, midmarket and smaller carriers may gain increased access to the capital markets. This trend is still in its early days, but the indicators are cause for optimism.

To learn more, download PCS First-Quarter 2013 Catastrophe Bond Report: Another Big Deal now.


Gary Kerney

Gary Kerney, one of the most prolific contributors to this blog, retired from Verisk in 2013. Mr. Kerney served as assistant vice president, Property Claim Services (PCS). Since joining PCS in 1981, he worked on catastrophe identification, loss estimating, and catastrophe response and mitigation.