While property and casualty catastrophe bond primary issuance levels were “uncharacteristically low” in the fourth quarter of 2015, totals at year-end were only slightly lower than the all-time high levels reported in 2014, according to GC Securities, a division of MMC Securities, a U.S. registered broker-dealer.
During 2015, 144A P&C cat bond primary issuance totaled $5.917 billion, with outstanding risk capital at $22.640 billion, said a briefing published by GC Securities, titled “Catastrophe Bond Update: Fourth Quarter and Full Year 2015.”
The year began strongly with record issuance levels in the first quarter of 2015, but experienced the second biggest dip in the market for a decade during the fourth quarter, according to the briefing.
The relatively low issuance levels of completed 144A P&C catastrophe bonds during the fourth quarter benefited five sponsors – one new and four repeat – and totaled $1.425 billion.
The new sponsor was Amtrak’s captive Passenger Railroad Insurance Ltd., which marked “the most significant transaction with successful placement of $275 million of Principal At-Risk Variable Rate Notes issued from the newly formed PennUnion Re Ltd.,” the report said.
For the public sector risks involved in the Amtrak placement, GC Securities served as joint structuring agent and joint bookrunner for the Series 2015-1 Notes. The Series 2015-1 Notes provide per occurrence, parametric triggered protection from storm surge and wind resulting from Named Storms as well as earthquakes affecting the Northeast region of the United States.
“Overall, 2015 proved to be a strong issuance year for the cat bond market,” said Cory Anger, global head of ILS Structuring, GC Securities.
“The relatively low levels of activity we saw at year-end may be due to the fact that sponsors, who might ordinarily issue in the fourth quarter, had the flexibility to delay issuance to Q1 2016 in an effort to either obtain better execution, or to avoid transaction crowding. We view this shift in sponsors’ willingness to prioritize execution over specific renewal dates as a further sign of the maturity of the insurance-linked securities space,” Anger added.
Pricing dynamics in the fourth quarter were also mixed, with bonds trading in different directions based on the risk level, peril exposure and relative market size, GC Securities said.
As was the case during 2015, particularly in the second half of the year, the market saw “continuing rate compression as well as the trend of sponsors and investors rotating their investment portfolios toward higher risk, higher return positions,” the report said.
The willingness and interest of the 144A catastrophe bond investor base to add risk in exchange for more yield is worth noting, the report noted, because of the value proposition it presents to sponsors.
Anger added: “In today’s compressed rate environment, where the margin for error is low, investors will likely look towards higher quality risks. Overall, we view these patterns as long-term net positives for the stability and reliability of the 144A and private cat bond marketplaces. Looking forward to 2016, absent of a major market disruption, we expect that risk spreads in the 144A P&C and private cat bond market will remain flat to slightly down. Especially as new sponsors continue to incorporate alternative capital into their strategies, we expect issuance to be similar to the last several years with further growth in the private cat bond market.”
Source: GC Securities