Record issuance of private cat bonds in Q2
The catastrophe bond market performed well in the second quarter as private catastrophe bond issuance rose to its highest levels yet.
This is according to GC Securities, a division of US broker MMC Securities, in its latest briefing on the cat bond market, which stated that primary issuance levels were at their fourth highest second quarter on record.
However, despite strong activity in Q2, aggregate volume was lower than the previous two second quarters. For the second quarter of 2015, aggregate volume dropped to $2.5 billion, compared with $3.3 billion in 2013 and $4.5 billion in 2014.
“That said, the investor base continued to embrace new sponsors and perils despite the emergence of a pricing floor, as demonstrated by the second quarter new issuances,” said GC Securities.
The investor base also supported significant growth in private catastrophe bonds, with nine such deals coming to market in the second quarter, representing $556.3 million of risk capital and outpacing growth in the 144A catastrophe bond market.
Cory Anger, global head of ILS structuring, GC Securities, said: “We continue to see high demand among ILS investors for non-traditional diversifying exposures, which has encouraged new sponsors to evaluate alternative capital for protection in new regions not currently accessing the alternative capital and catastrophe bond markets.”
The pricing floor that was seen in the second quarter, particularly for lower expected loss catastrophe bond structures, signalled a trend that GC Securities expects to continue for the near future.
This development was further evidenced by the secondary pricing of outstanding 144A P&C catastrophe bonds, which has continued to trend upward throughout the year.
As of June 30, 2105, secondary pricing was sitting above the 2015 initial issuance trend curve, which suggests investors are demanding a higher spread than the primary issuance spread in order to facilitate a trade in the secondary market.
GC Securities said: “The reach for yield, even within the catastrophe bond asset class, has resulted in some investors reducing allocations to lower than expected loss deals. This should encourage sponsors to cede less remote risks to the capital markets where a pricing floor is not yet definitive.”
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