With Rendez-Vous de Septembre behind us, a new set of trends has emerged for the catastrophe bond sector. Some that PCS has tracked since the end of 2012 remain, while new issues have inserted themselves firmly into the sector’s collective consciousness. With a big issuance year already upon us (once again), the market dialogue is shifting from attaining new issuance heights to broader maturation.
1. Market momentum
With more than $1.5 billion raised in the third quarter through catastrophe bonds — up more than 100 percent year over year — it’s clear that the market has maintained (if not increased) its second-quarter momentum. Several noteworthy transactions came to market — from first-time deals to innovative structures — showing that the sector’s growth is multidimensional.
2. Publicly managed entities
In a unique first-time issuance, First Mutual Transportation Assurance Co. sponsored MetroCat Re, a transaction that provides protection to New York’s Metropolitan Transportation Authority. This follows 2013 transactions from both Florida Citizens and Louisiana Citizens. The result is $590 million in catastrophe bonds from publicly managed entities this year. Publicly managed entity participation in the catastrophe bond market is thus growing, and it will be interesting to see if new players enter the space in the fourth quarter or ahead of hurricane season in 2014.
3. Capital sources
The flow of new entrants and additional capital into the ILS sector continues and appears to show no signs of slowing. The big question now being discussed across the sector is whether the pension fund sector will increase its allocation to the ILS asset class. Estimated to have $20 trillion to $30 trillion under management globally, the pension fund sector could have a profound impact on the property catastrophe reinsurance market as a whole.
4. Traditional versus capital markets capacity
This year’s Rendez-Vous de Septembre featured a greater level of capital markets participation than in past years, according to discussions with a wide range of market stakeholders. Increased accessibility and declining frictional costs have made catastrophe bonds and other ILS transactions viable risk and capital management tools for a wider range of sponsors, and many believe that this is fundamentally changing the property catastrophe market. The permanence of this new capital remains to be seen, as a debate continues between proponents of traditional reinsurance capital and those of capital markets alternatives.
5. Secondary market liquidity
As mentioned above, the market is now looking seriously at the need for a robust secondary market and how greater liquidity could be attained. This marks the beginning of what could be a major step toward real-time risk management: Investors would be able to enter and exit positions more easily, optimizing their portfolios quickly in the face of major events.