ILS ‘firsts’ transformed the market in 2014: PCS
A series of ‘firsts’ seen by the insurance-linked securities (ILS) market in 2014 have been transformational for the sector, which saw $7.8 billion of issuance, of which $1.5 billion represented the largest catastrophe bond in the market’s history.
According to an annual market report by Property Claim Services (PCS), 2014 was the first year to see five catastrophe bonds of $450 million or more, accounting for nearly 47 percent ($3.7 billion) of capital raised, as well as the first year to launch four transactions covering Japan.
Other substantial observations included eight new sponsors which raised $2.4 billion, the first European indemnity-trigger catastrophe bond and the first year cat bond lite truly gained traction, resulting in $242 million in new limits issued across three platforms.
2014 also represented the biggest index-triggered catastrophe bond in market history at $750 million.
“Insurers and reinsurers have generally accepted the viability of catastrophe bonds as a strategic risk transfer and capital management tool, even if they haven’t entered the market yet,” said the report, which also stated that trigger innovation and the introduction of loss aggregation platforms for new regions and lines of business could provide another transformational opportunity for the catastrophe bond market in the future.
According to PCS, North American exposed limits surged 20 percent, indicating that room for growth remains for risks most frequently transferred through catastrophe bonds.
It also said that the increase in capital raised last year came despite a decline in catastrophe bonds completed.
Catastrophe bond issuance fell 25 percent from 32 in 2013 to 24 in 2014, however the average transaction size surged 44 percent year over year to $324 million.
“Following a silent third quarter, sponsors completed six transactions, raising $2.1 billion,” said the report. “As a result, the fourth quarter of 2014 became the most active in catastrophe bond market history, with capital raised up 14 percent.”
The cat bond lite market grew substantially with sponsors completing ten publicly revealed cat bond lite transactions in 2014. The introduction of two new cat bond lite platforms allowed sponsors to raise $242 million in risk. The largest transactions — Market Re 2 and Market Re 3 — were completed on Horseshoe Group’s cat bond lite platform, with Market Re 2 ($32 million) using an indemnity trigger and Market Re 3 ($30 million) using a parametric trigger.
Index triggers were most popular among those transactions, accounting for 50 percent of the transactions completed and 42 percent of the capital raised. Indemnity triggers were featured in two transactions ($42 million), with parametric in one.
Other notable happenings included in 2014 the three transactions which included coverage for Canada: Tradewynd Re, the second Kilimanjaro Re, and Riverfront Re; and diversification of perils.
“The recent relatively benign catastrophe seasons and growth of alternative reinsurance caused many traditional catastrophe-oriented reinsurers and alternative capital markets to look for new ways to diversify,” said the report. “Many of those markets are now looking to do the same across non-catastrophe perils, such as fire and related perils.
“As sponsors and other stakeholders find new ways to structure catastrophe bonds and develop new triggers, the market’s ability to absorb the $900 billion in capital said to have an interest in ILS may improve. There’s plenty of room for growth, and the sector’s intellectual strength around the world is well positioned to make it happen.”
