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Catastrophe bonds are on track for a record year

Catastrophe bonds are on track for a record year

A record $4.5 billion in catastrophe bonds issued in the second quarter of this year shows the alternative risk transfer method is maturing amid strong investor demand and limited losses.

Seventeen deals closed during the quarter, according to Willis Capital Markets & Advisory, surpassing the previous quarterly record of $3.5 billion in nonlife cat bonds in the second quarter of 2007. It included the largest cat bond ever issued.

Willis and GC Securities Inc. put total first-half cat bond issuance at $5.7 billion; Aon Benfield Securities Inc. put the value at $5.9 billion.

The respective units of Willis Group Holdings P.L.C., Aon P.L.C. and Marsh & McLennan Cos. Inc. and several other experts agree that this year looks to break the annual cat bond issuance record of more than $7 billion in 2007.

“I would be surprised if we didn't go over $7.2 billion” in 2014, said Gary Martucci, director of financial services ratings at Standard & Poor's Corp. in New York.

“The odds are good that we will have a record year,” said Aileen Meehan, New York-based partner at law firm Edwards Wildman Palmer L.L.P., which advises clients on cat bonds.

“We had a record-setting quarter and I think we are likely to see by the end of 2014 a record year,” said Bill Dubinsky, head of ILS at Willis Capital Markets & Advisory in New York, which said the nonlife cat bond total this year could reach $8 billion to $9 billion.

Cat bonds placed during the first half of the year covered primarily U.S. risks such as storms and earthquakes, and included Japanese quakes and European windstorms. The record $1.5 billion cat bond by Citizens Property Insurance Corp. covered its hurricane risks in Florida.

Demand for the Everglades Re Ltd. deal sponsored by the Jacksonville, Florida-based insurer was so strong that it grew twice from its original offering of $400 million.

“We were very pleased with the strong investor demand,” said Jennifer Montero, chief financial officer of Citizens.

Favorable pricing and conditions in the cat bond and traditional reinsurance markets allowed Citizens to replace a $750 million cat bond and $854 million in traditional reinsurance, nearly doubling its overall 2014 reinsurance program to $3.27 billion from $1.85 billion last year at “virtually the same cost,” Ms. Montero said.

“You have a maturing market,” said Willis' Mr. Dubinsky. “The products have been around for 20 years and most of the larger potential sponsors, insurers and reinsurers are familiar with the products.”

“It certainly feels like the foundation is much stronger than it's ever been,” said Paul Schultz, CEO of Aon Benfield Securities in Chicago. “The clients' acceptance of the products is growing.”

“Insurers have gotten more comfortable with catastrophe bonds as part of their catastrophe reinsurance programs,” said Jim Auden, managing director at Fitch Ratings Inc. in Chicago.

Interest in the catastrophe bond market is strong from both investor and sponsor sides, said Ben Brookes, London-based vice president of capital markets at modeling firm Risk Management Solutions Inc.

“There is pretty significant growth happening at the moment,” said Mr. Brookes. “We see increasing interest using RMS products on both sides; on the issuance side in terms of helping insurance companies and reinsurance companies think about how they transfer risk to the capital markets, and equally on the investor side.”

Favorable pricing is forging the way for market growth, he said.

“The combination of the attractive pricing, broadness of coverage, and fully collateralized and multiyear nature of catastrophe bonds has become very attractive to people looking for protection and is driving the growth in the marketplace,” said Cory Anger, global head of insurance-linked securities structuring at GC Securities in New York.

The pricing has been so attractive, she said, that it has lead to price softening in reinsurance cover, forcing the traditional sector to react.

“It's really been the traditional market moving in response to how the capital markets are currently viewing risk,” Ms. Anger said.

The market in which catastrophe-related losses have been limited is not entirely without its setbacks, however.

Munich Reinsurance Co. in June withdrew its latest cat bond, Queen Street X Ltd., “due to weak demand,” Fitch said in a statement.

“Pushback on the deal's pricing could be a sign that investors are approaching a limit on acceptable catastrophe risks,” Fitch said.