Catastrophe Bonds Reach Record $25.4B Outstanding

The outstanding volume of catastrophe bonds and other kinds of insurance-linked securities has hit a record, according to website Artemis.bm.

There are presently $25.4 billion worth of these financial instruments outstanding, up a bit from $25.3 billion at the end of 2014.

The increase comes from issuance outpacing maturities this year.

But issuance itself hasn’t been high enough to match last year’s record figure.

Some $7.3 billion of cat bonds and ILS have come out in the year to date, compared with an unprecedented $9.1 billion for all of 2015. Since we’re so close to the end of the year, a new issuance record is improbable.

Still, 2015 “is likely to be in the top three issuance years…demonstrating continued appetite on both sides of the market for securitized capital market re/insurance solutions,” said Steve Evans, owner and editor of Artemis.

The cat bond market faced heighted competition from traditional insurers this year, with insurance companies offering premiums that are competitive to the yields a bond sponsor would pay out.

This probably steered some insurers away from cat bonds and into traditional reinsurance. 

Among deals issued in the latter half of the year was a $100 million bond providing earthquake protection to an insurance pool in Turkey. This was the second time the Turkish Catastrophe Insurance Pool (TCIP) tapped the capital markets. 

Cat bond arranger GC Securities said in a brief today that investor appetite for higher-risk deals had risen “slightly” in the third quarter.

Evans said he didn’t expect investors to be spooked by the looming default of Multi-Cat Mexico, which almost certainly took a hit from Hurricane Patricia. “I haven’t seen evidence of investors being cautious due to the MultiCat Mexico cat bond being likely to trigger," he said.

Indeed Evans sees a silver lining.

"Being parametric, investors will at least find out the fate of the bond more quickly," he said. "Uncertainty around whether the deal will trigger will likely help those structuring deals to optimise parametric triggers in future issues as well."

A parametric trigger is based on a measurable event—such as a certain size earthquake or storm surge—that allows the bond to withold payments to bondholders. An indemnity trigger, in contrast, is based on the level of losses that the sponsor incurs in a covered catastrophe. 

GC Securities said it expected the market next year to keep branching out into coverage of new perils, although bond sponsors seeking hurricane and earthquake protection in the U.S. will remain the biggest drivers. Presently about 71% of outstanding cat bonds offering property and casualty insurance were concentrated in these segments of the U.S. market.