GC Securities, a division of MMC Securities Corp., a U.S. registered broker-dealer and member of FINRA/SIPC, today released an analysis of activity and trends within the catastrophe risk market from the fourth quarter of 2013, also including the outlook for 2014. According to the report, influence from direct capital markets’ participation in reinsurance programs, coupled with catastrophic insured losses well below historical averages in 2013, put significant pressure on global catastrophic reinsurance pricing. As a result of significantly reduced pricing, relative to recent years, approximately $7.1 billion worth of new property and casualty (P&C) catastrophe bonds were issued in 2013 - the second highest record year for P&C issuance.
The briefing, Catastrophe Bond Update: Fourth Quarter 2013, finds that in the fourth quarter of 2013, catastrophe bond issuance of $1.82 billion was minimally offset by the limited amount of catastrophe bond maturities of $360 million, resulting in a net change of risk capital outstanding of $1.46 billion. As a result of the positive net change in risk capital outstanding, total risk capital outstanding at the end of 2013 reached an all-time high of $18.58 billion, an estimated 16 percent of global property catastrophe limit purchased annually.
While the capital markets pressured pricing through the first three quarters of 2013, traditional reinsurers responded to protect their market share and limit further pricing impact by offering attractive pricing, expanded structural features and in some cases, collateralized capacity and/or limited multi-year capacity. Given the desirable pricing seen in the traditional market, some insurers began lining up capacity for their January 1, 2014 renewals before the end of the third quarter. Despite the traditional market’s response, insurance-linked securities (ILS) issuance in the fourth quarter of 2013 remained robust, as sponsors issued $1.82 billion of capacity, a level of issuance consistent with the fourth quarters in previous years.
“Overall, 2013 included seven new sponsors who collectively secured $1.46 billion of catastrophe bond capacity,” said Cory Anger, Global Head of Insurance-Linked Securities for GC Securities. “In addition to these new sponsors, another prevalent change in the market was the increasing use and acceptance of indemnity-based triggers. Given that spreads have tightened between indemnity and other trigger types, sponsors were inclined to take advantage of investors’ openness to indemnity triggers to reduce coverage basis risk without a material increase in pricing relative to non-indemnity trigger pricing.”
According to the report, traditional players in particular are hedging their bets and creating their own capital markets decisions to attract, manage and utilize capital from third-party sources whether in the form of fund management, managed accounts or sidecars. This will allow reinsurers the opportunity to securitize the most capital-intensive parts of the business while providing valuable cost-efficient capacity on other business lines.
Despite the significant decrease in ILS pricing over the past 12 months, investor demand continues to be robust. ILS managers continue to see interest in deploying large amounts of capital into the sector, but given the limited opportunities to actually deploy such capital, some ILS managers are maintaining a soft closed position with respect to bringing incremental capital into the ILS space.
“The growing influence of alternative markets capacity is pressuring traditional reinsurers’ business model and challenging them to compete against a model with lower-cost of capital that continues to enter the reinsurance market,” said Chi Hum, Global Head of Distribution for ILS for GC Securities. “As the catastrophe bond market continues to mature, more new sponsors are looking to the alternative market space for meaningful capacity and we expect that this trend is likely to continue through 2014.”
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