The FINANCIAL — As investor demand has continued to grow for catastrophe bonds (CAT), sponsors have been able to offer deals at considerably lower coupon rates and with increasingly favorable structures that suit individual company needs, according to Fitch Ratings. As deals have leaned further in favor of sponsors, continued strong demand for a diversifying set of risks remains the key driver of the thriving CAT bond market.
The CAT bond market experienced near record issuance in 2013, leading to an all-time high level of outstanding CAT bonds of just over $20 billion. There has been approximately $7.1 billion of global CAT 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, according to Fitch Ratings, Inc.
Bond demand is underscored by new issues that have been consistently oversubscribed, with many experiencing 10%-20% growth above their initial offering size.
Fitch expects that investor demand will remain strong in 2014, particularly for geographically diversifying perils, and that current market conditions remain likely to drive further issuance of CAT bonds in the near term if (re-)insurers believe they can produce a cost-effective alternative to supplement their reinsurance program.
Most of the focus of the CAT 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 CAT bond market currently exposed to U.S. wind damage, compared with only 45% in 2003, according to Fitch Ratings, Inc.
While the majority of issuances in 2013 included coverage for U.S. hurricane risk, they also covered other perils, including U.S. and Canada earthquakes, Turkey earthquake, Australia cyclones and U.S. thunderstorms and winter storms. Non-U.S. catastrophe risk tends to be more fragmented and not as easily modeled and, thus, is less commoditized. CAT bond issues that include non-U.S. risks as qualifying triggers offer investors additional diversification of both perils and regions that remains highly sought after. In 2013, $2.8 billion of new CAT 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, according to Fitch Ratings, Inc.
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