The new year may have only just begun, but that’s unlikely to slow speculation about what lies ahead. Will 2013 rival 2012, or will we see a post-spike dip as we did in 2011? Several factors are poised to influence catastrophe bond issuance in 2013.
1. A big first quarter: 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 a strong start will be necessary for the 2012 momentum to continue.
2. Publicly managed entities: 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 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.
3. Investor needs: The prevailing low interest rate environment has made catastrophe bond yields particularly attractive to investors. Even if broader financial market conditions change, though, many believe investor interest in catastrophe bonds will continue, as they do not correlate with broader financial markets.
4. The January reinsurance renewal: Some sponsors have shown 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 hit by the storm could affect future issuance.
5. Cost of catastrophe bond capital: 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.
Despite those factors, one thing is clear: The insurance and reinsurance industry remains committed to catastrophe bonds as a form of risk transfer. The next challenge will be to find a way to make the bonds available to the broader industry.