Q2 Cat Bond Issuance at Highest Level Since 2010; Analytics Driving Capital-Markets Interest

NU Online News Service, July 24, 2:01 p.m. EDT

Second-quarter catastrophe-bond issuance increased in 2012 over 2011, and a recent analysis describes the current market outlook as “very encouraging” as strong investor demand and available capital point to increased issuance from sponsors going forward.

In 2012’s second quarter, new non-life cat bond issuance volume totaled $2.1 billion through seven transactions, up from $600 million through four deals a year ago, according to Willis Capital Markets & Advisory (WCMA). The quarterly issuance volume is the second-highest going back to 2008, topped only by the 2010 second quarter’s issuance of $2.3 billion.  

The quarter saw the largest single tranche cat bond ever placed, with Florida’s last-resort property insurer, Florida Citizens, sponsoring a two-year, $750 million transaction with Everglades Re in which Everglades Re provides occurrence coverage for Florida hurricanes on an indemnity basis.

Louisiana’s last-resort insurer, Louisiana Citizens, sponsored its first cat bond in a transaction with Pelican Re: a three-year deal that provides $125 million of indemnity-triggered protection against hurricane losses in Louisiana on an occurrence basis. 

WCMA says, “U.S. hurricane-exposed transactions dominated the quarter’s issuance and continue to dominate the non-life market, with 73 percent of outstanding cat-bond limit exposed to U.S. hurricane risk of some form.” 

During the second quarter, WCMA says, eight cat bonds matured totaling about $1.4 billion.

Looking forward, WCMA says, “We believe the current market outlook is very encouraging. Reduced risk spreads as a result of strong investor demand and available capital should stimulate increased issuance from sponsors in the future.”

WCMA notes the first half of the year has seen $3.4 billion of non-life issuance, leading the firm to predict total issuance for the year to fall in a range between $5.5 billion and $6 billion, barring a significant catastrophe event.

Rowan Douglas, CEO of Willis Global Analytics and head of the Willis Research Network, says in the report that scientific research and the use of data and analytics are changing the reinsurance market and encouraging more involvement from the capital markets.

He notes the increased use of models, and how they are not just useful in studying historic events but in developing understanding of the correlations between different weather regions. “This is not just issues like El Nino/La Nina, but other correlations not so well understood at present,” he says. “This, in turn, helps the industry to control accumulations of risk and maintain better diversification.”

On how cat modeling encourages more involvement from the capital markets, Douglas says, “It seems that there is some comfort in the catastrophe modeling currently available and that this has been instrumental in getting capital-markets investors involved in the market already.” 

He suggests that as capital-markets investors increase their involvement in the catastrophe-risk sector, scientific-research investment will increase.


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