A Mature Cat Bond Market? 2015 Issuance Dropped 25% Over 2014

The catastrophe bond market may be showing some steady signs of maturity.

Bond issuance, measured by new limit, came in at $6 billion in the 2015 fiscal year. That’s one of the five most active catastrophe bond issuance years in market history, but it reflects a 25 percent drop from 2014, according to the latest report from the Property Claim Services unit of Verisk Insurance Solutions.

Why was there such a drop?

One factor, according to PCS, was “continued insurance-linked securities market maturity, as cedents and markets explore the full range of risk transfer alternatives available to them in this sector.”

Also, the drop in original issuance may reflect a new level of market sophistication, according to the report.

“Perhaps counterintuitively, the decline in original issuance indicates that the market continues to gain a deeper understanding of how ILS can support improved risk and capital management worldwide,” the PCS report concluded. “The ongoing rise in collateralized reinsurance use and the relative upsurge in industry loss warranty activity demonstrate a continued commitment to ILS, as well as a growing sense of which approach makes the most sense for different cedent requirements.”

PCS said that the year-over-year decline, in terms of dollars, came from the shortage of extremely large transactions.

In 2015, the average transaction size dropped nearly 25 percent to $250 million. But in 2014, there were deals, such as the nearly $1 billion in limit that came from the Kilimanjaro series, with Sanders Re adding $750 million in just one transaction. As well, Everglades Re raised $1.5 billion in protection. Those high numbers don’t always occur every year due to multiyear transactions that are the norm, PCS said.

Some other findings in the PCS report:

• Catastrophe bonds came to market in nine countries during 2015, including both repeat sponsors and countries debuting to the market.
• Additionally, six U.S. publicly managed entities raised $1.9 billion in cat bonds.
• Out of 2015’s cat bond transactions, three had parametric triggers, five used the PCS Catastrophe Loss Index and 16 had indemnity triggers. (PCS said that this shows the market is diverse enough to support both long-term expansion and the flexibility to meet wide-ranging needs of different types of sponsors.)
• Five of the catastrophe bonds completed in 2015 had no exposure to North American risk. Two covered risks in Japan, one dealt with European Risks and another covered China, PCS said. And then there is Bosphorus Re, offering protection for Turkish risks, bringing $100 million in fresh capital, according to the report.
• The 2015 fourth quarter produced $1.4 billion in bond issuance, down from $2.1 billion over the same period last year and a 31 percent drop.
• The 2015 fourth quarter saw the completion of five cat bond transactions, versus six in the 2014 fourth quarter.
• Sponsors raised $1 billion in 2015 for catastrophe bond transactions that included Canada, just $20 million below the level met in 2014. Each year counted three completed transactions.
• There was no publicly disclosed cat bond lite issuance activity in the 2015 fourth quarter. But the year included $490 million in new limits from 16 transactions, more than double the $242 million in publicly revealed cat bond lites in 2014.

Full details can be found in: “Market Growth and Original Risk: PCS FY 2015 Catastrophe Bond Report.”

Source: Property Claim Services/Verisk Insurance Solutions