The catastrophe bond market experienced near-record issuance in 2013, with $7.1 billion of global issuance falling just short of the all-time record set in 2007 of $7.6 billion, Fitch Ratings reported last week.
Still, the near-record level of issuance—and a 22 percent jump in issuance over 2012—did result in an all-time high level of outstanding catastrophes of just over $20 billion, Fitch said.
New issues have been consistently oversubscribed, with many experiencing 10-20 percent growth above their initial offering size, Fitch reported.
As investor demand has continued to grow, insurance carrier sponsors have been able to offer deals at considerably lower coupon rates and with increasingly favorable structures that suit individual company needs, according to Fitch Ratings.
AIG’s $400M Issuance
Separately, American International Group announced a $400 million placement of catastrophe bonds covering a diversified portfolio of AIG’s commercial and consumer risks through Tradewynd Re Ltd., demonstrating the favorable structures of this year’s deals.
This $400 million placement was the second through Tradewynd Re.
In July, AIG announced a five-year, $125 million deal providing indemnity reinsurance protection against named storms on a per-occurrence basis for a diversified portfolio of risks that includes commercial property, energy marine and aviation as well as high-net-worth consumer residential. One of the sponsor-friendly features of the deal gave AIG the ability to shift the covered layer up or down within pre-determined limits.
The December placement, according to AIG, also provides indemnity reinsurance protection against U.S., Caribbean and Gulf of Mexico named storms, and U.S. and Canadian earthquakes. This placement involved three tranches of notes—one with a one-year term and two with three-year terms.
Due to strong investor demand and favorable pricing, AIG increased the offering to $400 million from an initial $100 million offering size, AIG said.
The transaction closed Dec. 18, 2013 and provides AIG with fully collateralized coverage against losses on a per-occurrence basis (under three reinsurance agreements related to the notes).
In a separate announcement, catastrophe modeling firm RMS highlighted a different feature of the Tradewynd Re Ltd Series 2013-2 notes issuance—a new modeling approach allowing three competing modeling firms to analyze the exposure data underlying the transaction.
In a media statement, Peter Nakada, managing director of RMS capital markets, suggested that this approach was a factor driving substantially tighter spreads and larger issuance than the prior Tradewynd bond.
“Typically data is privy only to the firm retained to produce the risk analysis included in the offering documentation. The delivery of exposure data to all modeling parties provides each firm the opportunity to present investors with a more accurate representation of the risk of the bond under multiple views,” the RMS statement said.
According to RMS, high levels of demand for the notes not only allowed AIG to upsize the transaction from $100 million to $400 million, but investors were also willing to accept a risk premium 125 basis points lower than the equivalent tranche to the prior issuance, Tradewynd Re Ltd Series 2013-1.
Perils, Geographies Expanding
In its announcement, Fitch said it expects investor demand to remain strong in 2014, particularly for geographically diversifying perils.
- Most of the focus of the catastrophe bond market remains on model-driven property risks, in particular U.S. peak zone risk.
- Investors remain significantly exposed to U.S. hurricane exposure, with approximately 72 percent of the outstanding catastrophe bond market currently exposed to U.S. wind damage, compared with only 45 percent in 2003.
- While the majority of issuances in 2013 included coverage for U.S. hurricane risk, they also covered other perils, including U.S. and Canada earthquakes, Turkey earthquake, Australia cyclones and U.S. thunderstorms and winter storms.
- In 2013, $2.8 billion of new catastrophe bond issuance included triggers for events occurring in markets outside the United States, representing 40.1 percent of all issuance during the year, which was a slight increase over the past few years.
- 30 different sponsors of catastrophe bonds came to market during the year, including 11 that were first-time sponsors.
- The array of sponsors in 2013 extended beyond the traditional insurers and reinsurers that have been the mainstays of the marketplace and included non-traditional sponsors such as First Mutual Transportation Assurance Co. (MetroCat Re), New Jersey Manufacturers Insurance Group (Sullivan Re) and state-/government-sponsored entities such as Citizens Property Insurance (Everglades Re) and the Turkish Catastrophe Insurance Pool (Bosphorus 1 Re).
- In addition to AIG, Nationwide Mutual and USAA were other long-time sponsors that went to market as sponsors twice in 2013.
Sources: Fitch Ratings, American International Group, RMS