Cat bond issuance on track for record
The catastrophe bond market remains on course to potentially enjoy its most prolific year ever, despite apparent low levels of issuance in the first quarter.
That is the view of GC Securities in a report released this week called Catastrophe Bond Update: First Quarter 2013.
The report said that although only two cat bonds closed during the first quarter of 2013, representing total issuance of $520 million, the level is deceiving as activity in the capital markets and the influence of “non-traditional” capacity has never been higher.
It noted that the $520 million of new issuance was offset by $352.5 million of maturities, driving an increase of risk capital outstanding of $167.5 million.
This meant total risk capital outstanding increased during the first quarter of 2013, reaching an all-time high water mark of $15 billion. This marks the eighth consecutive quarter of growth in risk capital outstanding, up more than 17 per cent since the end of the first quarter of 2012.
Given scheduled maturities for the balance of 2013, and expectations about the current deal pipeline, risk capital should continue to increase over the balance of 2013. The level of expected additional issuance from GC Securities should support further growth of $17 billion to $19 billion of risk capital outstanding.
But when considering expectations for the remainder of 2013, GC Securities also said it expects the market to approach, if not exceed, the record for annual issuance of $7.0 billion set in 2007.
It did note, however, that such a forecast is dependent on cat bond market pricing remaining stable and non-US peak peril sponsors taking advantage of particularly attractive conditions to bring sizeable issuances to the market during the balance of 2013.
“Spreads in the catastrophe market tightened significantly during the first quarter of the year, driven by strong demand from investors seeking additional deployment opportunities,” said Cory Anger, global head of Insurance-Linked Securities (ILS) Structuring, GC Securities.
“Although the low interest rate environment has made the catastrophe market more attractive to institutional capital, it is not the primary driver of inflows. Rather, we are seeing significant demands in part because of the ‘decoupling’ of pricing between the traditional reinsurance and capital markets.
“While traditional reinsurance has capital constraints for peak risk zones, such as Florida, the cat bond market may be able to offer capacity at a lower price point because it does not have the same capital costs.”