Cat Bond Use Soars in 2013; Expected to Be Strong in 2014
December 27, 2013
By ARTHUR D. POSTAL
The catastrophe bond market is thriving, and sponsors are finding continued strong demand for a diversifying set of risks, according to Fitch Ratings.
A major factor in this ability to shape the bonds is that investors are finding capital appreciation on their investments, a Fitch report says.
“Bond demand is underscored by new issues that have been consistently oversubscribed, with many experiencing 10% to 20% growth above their initial offering size,” the report says.
On the flip side, that could mean trouble for investors—and the market—down the road. The report says most of the focus of the catastrophe bond market remains on model-driven property risks, in particular U.S. peak zone risk.
“Investors remain significantly exposed to U.S. hurricane exposure, with approximately 72% of the outstanding catastrophe bond market currently exposed to U.S. wind damage, compared with only 45% in 2003,” the report notes.
The report says there has been approximately $7.1 billion of global cat bond issuance in 2013, just short of the all-time record set in 2007 of $7.6 billion. In 2013, the market also experienced a 22% increase in issuance over the prior year.
The report adds that in 2013, $2.8 billion of new catastrophe bond issuance included triggers for events occurring in markets outside the U.S., representing 40.1% of all issuance during the year, which was a slight increase over the past few years.
Thirty different sponsors of cat bonds came to market during the year, including 11 that were first-time sponsors.
The array of sponsors in 2013 extended beyond the traditional (re-)insurers that have been the mainstays of the marketplace and included non-traditional sponsors such as First Mutual Transportation Assurance Co. (MetroCat Re), New Jersey Manufacturers Insurance Group (Sullivan Re) and state-/government-sponsored entities such as Citizens Property Insurance (Everglades Re) and the Turkish Catastrophe Insurance Pool (Bosphorus 1 Re).
Long-time sponsors, American International Group, Nationwide Mutual and USAA, each went to market as sponsors twice in 2013, the report said.
Fitch says it expects investor demand to remain strong in 2014. The report projects demand will be particularly high for geographically diversifying perils.
“Current market conditions remain likely to drive further issuance of catastrophe bonds in the near term if insurers and reinsurers believe they can produce a cost-effective alternative to supplement their reinsurance program,” the report said.