ILS Trend Tracking: Q2 2015By Tom Johansmeyer | July 1, 2015
The ongoing shift in underlying market trends over the past year shows how dynamic the catastrophe bond sector has become. Innovation, expanded geographical reach, and increases in market participation continue to shape the catastrophe bond market, opening more opportunities to both sponsors and investors.
The five key trends in the catastrophe bond market right now indicate increased flexibility and a strong foundation for future market growth:
1. A break from records: Record-setting issuance activity became the norm for a while, a trend that ended in the second quarter of 2015. Whether this is a brief break or a shift in how insurers and reinsurers use ILS capital remains to be seen. Rapid growth in collateralized reinsurance and cat bond lite appear to have stolen some of the catastrophe bond market’s momentum, but that’s indicative of a market still maturing and finding the most effective tools to use in managing risk and capital. The third quarter is unlikely to bring a sense of resolution to this trend because issuance activity historically has been thin. Last year, no property catastrophe transactions were completed (the one bond that came to market was for workers' compensation), so we’ll probably have to wait for the fourth quarter to get a better sense of where the catastrophe bond market is headed.
2. Keeping it private: Private transactions — including cat bond lite — continue their rapid ascent. Publicly revealed cat bond lite activity reached $400 million in the first half of 2015, putting it far ahead of the full-year 2014 total. Significant potential for increased adoption remains, particularly given the recent lift in inquiries to PCS from parties that have not yet tried cat bond lite. Further, new regions could affect future cat bond lite use. Stand-alone transactions covering Canadian and Turkish risks may fit well with the cat bond lite structure.
3. Representing the public: Publicly managed entities are no strangers to the catastrophe bond market, but the high concentration of them in second-quarter issuance is profound. Capital raised through catastrophe bonds for this sector accounted for a third of the first-half 2015 market total and more than half of the second quarter’s activity. And this comes in an “off” year for Everglades Re, which tends to complete a large catastrophe bond every other year; last year’s was $1.5 billion, the largest catastrophe bond ever completed. Further, publicly managed entities have a history of big issuances. In addition to the large totals achieved by Everglades Re, the most recent Alamo Re catastrophe bond reached $700 million, and the 2013 Tar Heel Re transaction reached $500 million.
4. A place for old pros: Veteran sponsors continued to dominate issuance activity this year. Only two catastrophe bonds came from first-time sponsors, and much of the first half’s activity came from sponsors that have several deals under their belts already. Yet this behavior follows chatter in the market about the need to include new risk areas and lines of business. It seems as though soft market conditions are refocusing the industry’s use of catastrophe bonds until more alternatives become available. The launch of PCS Turkey shows a step in the right direction, as do our current efforts to develop index tools for global energy and marine (physical damage only). It’s clear that new indexes will be crucial to unlocking ILS market expansion opportunities.
5. Competition from alternatives: Cat bond lite isn’t the only alternative available to insurers and reinsurers. Collateralized reinsurance has grown rapidly over the past six years. According to an Artemis report, this structure has swelled from $7.7 billion in 2009 to $36 billion at the end of the second quarter of 2014. And traditional reinsurers have also become more competitive as they seek to protect and grow their share of the market. What the market will need to figure out going forward is the best use for each form of capital in managing risk most effectively.
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