The rapid growth of the catastrophe bond market can be attributed to many factors, some of which extend back for years. However, PCS sees five trends as instrumental in shaping 2014, contributing to increased ILS use and broadening the base that can drive future market growth.
1. Index swing: Use of the PCS Catastrophe Loss Index was effectively unchanged from 2013 to 2014, with $2.8 billion in catastrophe bonds using it. However, the addition of catastrophe bond lite transactions using the index results in a 4 percent increase in PCS use year over year. The use of PCS data in five publicly revealed catastrophe bond lite transactions ($113 million) demonstrates a continued commitment to index triggers despite increases in indemnity-triggered transactions over the past several years. The development of loss aggregation platforms for new regions and lines of business should contribute to future growth in index trigger usage.
2. Big deals: While large catastrophe bonds have not been uncommon, their use surged in 2014. Sponsors completed five transactions of $450 million or more, accounting for nearly 47 percent of capital raised last year ($3.7 billion of $7.8 billion). Excluding the $1.5 Everglades Re transaction (by a publicly managed entity), catastrophe bonds using PCS accounted for $1.7 billion of the $2.2 billion raised through these large deals. The two index-triggered Kilimanjaro Re transactions, amounting to nearly $1 billion, accounted for 13 percent of total 2014 catastrophe bond capital raised.
3. New developments: Two thousand fourteen was certainly a year of “firsts.” We saw the completion of the first public European indemnity-triggered catastrophe bond (Lion Re), eight first-time sponsors (raising $2.4 billion), and catastrophe bond lite transactions completed for the first time on two new platforms. Those developments show that the catastrophe bond market continues to find ways to grow, even as it matures.
4. Cat bond lite: Three cat bond lite platforms facilitated the completion of ten publicly revealed transactions, resulting in $242 million in fresh capital. This made 2014 the breakout year for the cat bond lite structure, providing a viable new tool to support flexible capital management around the world. A strong year doesn’t guarantee continued adoption, but the benefits of cat bond lite make a strong case for continued adoption.
5. Reliance on innovation: The “firsts” of 2014 speak to the role of innovation in growing the ILS market, and we expect this to continue in 2015. As sponsors and other stakeholders find new ways to structure catastrophe bonds and develop new triggers, the market’s ability to absorb the $900 billion in capital said to have an interest in ILS may improve. There’s plenty of room for growth, and the sector’s intellectual strength around the world is well positioned to make it happen.