Tallies of catastrophe bond issues for the first-half have been coming in from reinsurers and brokers over the last two weeks, with the numbers all suggesting that 2013 could be a record year of issuance.

  • Earlier this month, Aon Benfield reported that $3.3 billion in deals closed in the second quarter, and predicted a year-end total in the $7-$8 billion total.
  • Last week, Swiss Re reported that second-quarter issuance was $3.823 billion, just $2 million below the $3.825 billion total for 2007, which was the previous record high for the second quarter.
  • The latest report, from Willis Capital Markets & Advisory, published on Tuesday, puts second-quarter 2013 issuance at $2.2 billion, but likewise puts the first-half total at around $3.8 billion.

(The second-quarter difference primarily relates to the fact that Willis does not include three deals marketed and priced in the second-quarter totals, while the other two firms include those deals in their second-quarter counts. Swiss Re also includes insurance-linked securities for extreme morbidity risk on the life side in its tally.)

According to a chart in Willis’ report, non-life issuance reached its peak in 2007 with a $7.2 billion total, a number that the Capital Markets & Advisory experts believe is within reach for 2013. “Our current best estimate is $6 to $7 billion in non-life issuance (excluding private deals with limited information). If sponsors accelerate deal execution into 2013 that would otherwise have occurred in 2014, exceeding $7 billion seems quite possible,” the Wills report says.

Noting that deal timing decisions of sponsors—insurers—will influence where overall market numbers end up for the year, the report suggests that insurers that may have resisted “timing the market” in past years may find current conditions may be too attractive to pass up. The current environment offers favorable pricing as well as appealing deal structure choices.

On the pricing side, Aon Benfield has reported that ILS pricing is down 40 percent since 2012 midyear renewals.

“Along with the rapid decrease in spreads in the last few quarters, we have also seen more flexible terms and conditions,” the Willis Capital Markets report says. “This includes, for example, deals with ‘name your own reset’ provisions allowing firms to change the risk-return profile (within a range) on an annual basis.”

Other first-half 2013 deals “have had more expansive event definitions to better parallel traditional reinsurance language,” the report says, noting, for example, the availability of coverage for “named storms,” rather than just hurricanes for U.S. deals.

Markus Schmutz, head of ILS structuring and orgination for Swiss Re Capital Markets, gave a similar report on structural changes during a media briefing in New York City late last month.

“The risk profile of these transactions used to be locked in. So an investor who bought a 1 percent expected loss bond could be sure that for the term of the deal, the bond would never change. It would always be a 1 percent loss. And if the underlying risk [of the insurer] changed, then the attachment point would be shifted to adjust to the probability of 1 percent.”

But a carrier with a growing portfolio would not necessarily want to have their attachment point. “Having a constant attachment point is actually of great value to ceding companies,” Schmutz said, noting that investors are now willing to accept that as well.

Schmutz also said that indemnity triggers are becoming more common, and that aggregate triggers are being accepted by investors as well.

At the same briefing, Judith Klugman, head of ILS sales & distribution for Swiss Re Capital Markets, discussed the other side of the deals—and growing investor appetites. “”Really the conundrum that I face with investors is they really want more product,” she said.

Responding to a question about the portion of pension fund portfolios being allocated to insurance-linked securities, Klugman said that 1 percent is the number that’s thrown around. “We have one mutual fund whose CIO loves this, and has asked how can we grow this to be 2 percent, which seems so small, but there’s almost no way for them to grow to 2 percent,” she said.

The Willis Capital Markets & Advisory “ILS Market Update,” suggests some avenues for growth. “To continue the same pace of growth we have seen in the last few years across cat bonds and collateralized re, sponsors will need to deliver and investors will need to accept a growing pool of perils. Some of these are evolutionary and not revolutionary, think earthquake risk in places like Columbia, Chile, Israel and even China.”

“Others may represent a more radical departure from market norms. For example, will investors accept standalone U.S. terrorism risk if TRIPRA is non-renewed? Will casualty risk finally become more at home in the capital markets,” the report asks.

See related article, “Casualty ILS: The Time Has Come