Big year expected for cat bonds

New catastrophe bond issuance hit a record during the first quarter amid signs that the market may be poised for continued growth.

Data compiled by GC Securities, an affiliate of Guy Carpenter & Co. LLC, showed the quarter to be the cat bond market's most active first quarter since the company began tracking the data in 1997. There were eight new transactions totaling $1.34 billion in risk capital, topping the previous first-quarter high of $1.02 billion last year.

Meanwhile, investor demand for cat bonds continues to grow.

“The most significant development is, right after we put this out, two deals came out — another $1 billion or so,” said Chi Hum, global head of insurance-linked-securities distribution at GC Securities.

Two more potentially big deals in the market are likely to close before the start of the Atlantic hurricane season, he said.

“So we can end up with a decent year this year for new issuance,” Mr. Hum said.

ISSUER SIDE

On the issuer side, “increasingly, the users of reinsurance capacity are looking at cat bonds and valuing the different attributes of cat bonds,” he said.

Among characteristics that issuers are finding attractive are that cat bonds are fully collateralized and that multiyear cat bond programs can stabilize risk transfer pricing.

Also, cat bond components in issuers' risk transfer programs can provide leverage in seeking better pricing from reinsurers, Mr. Hum said.

“It's frankly been very hard to keep up with all the issuance, and I think that will continue through the year,” said Morton N. Lane, president of Lane Financial LLC.

He cited a hardening traditional market and pension funds' moving into the cat bond market after the 2008 financial crisis as “a happy convergence” driving cat bond market activity.

Christopher McGhee, founder and chief executive of McGhee Risk Capital LLC, said that he isn't surprised that the cat bond market is “ramping up.”

“Investors continue to like assets that have low correlation with their other assets. In the fixed-income sector, these are relatively high-yielding assets.”Mr. McGhee said.

Among exposures addressed in this year's first-quarter cat bond issues were California earthquakes, U.S. hurricanes, U.S. tornadoes, European windstorms and Japanese earthquakes.

A key development during the first quarter was an issue that essentially served as a renewal of last year's $300 million Muteki Ltd. transaction, which suffered a complete loss as a result of Japan's March 2011 Tohoku earthquake. The deal provided earthquake coverage to Zenkyoren Ltd., the Japanese National Mutual Insurance Federation of Agricultural Cooperatives.

In January, Zenkyoren came to market with another $300 million cat bond deal. Kibou Ltd. included “a little refinement in the triggers,” Mr. Hum said, but it was very similar to the Muteki transaction and sold at a price increase of just 20% above the deal done before the Tohoku earthquake.

Mr. Hum said that the Kibou transaction underscored what he sees as a positive development for the cat bond market: Cat bond pricing is decoupling from reinsurance market pricing. A major factor in that decoupling is the fact that cat bond investors — for whom the bonds are seen as a portfolio-diversifying investment — are looking at a completely different set of pricing drivers than are reinsurers with portfolios full of global catastrophe risks.

“That's a good development, and that's one that we've been counting on,” Mr. Hum said, because they thought it would be a positive development in driving the market if cat bond pricing could be viewed independently.

He noted that the approximately $12 billion in risk capital outstanding in the cat bond market represents “probably about 5% of total global property cat reinsurance.”

Mr. Hum said that he expects that percentage to continue growing.

Rodd Zolkos is a senior editor for sister publication Business Insurance.