GC Securities* Report Shows Healthy Catastrophe Bond Activity Supported by Record Issuance of Private Bonds
GC Securities, a division of MMC Securities Corp., a U.S. registered broker-dealer and member FINRA/NFA/SIPC, today released a briefing and analysis of catastrophe bond activity for the second quarter of 2015, which shows healthy activity across the market and primary issuance levels recorded as the fourth highest second quarter on record.
The briefing, Catastrophe Bond Update: Second Quarter 2015, reports that despite strong activity in the second quarter of 2015, aggregate volume was lower than the previous two second quarters on record. For the second quarter of 2015, aggregate volume dropped to USD 2.453 billion, as compared with USD 3.303 billion in 2013 and USD 4.492 billion in 2014. That said, the investor base continued to embrace new sponsors and perils despite the emergence of a pricing floor, as demonstrated by the second quarter new issuances. The investor base also supported significant growth in private catastrophe bonds, as issuances rose to their highest levels ever. In total, nine such deals came to market in the second quarter, representing USD 556.32 million of risk capital and outpacing growth in the 144A catastrophe bond market.
“We continue to see high demand among ILS investors for non-traditional diversifying exposures, which has encouraged new sponsors to evaluate alternative capital for protection in new regions not currently accessing the alternative capital and catastrophe bond markets,” said Cory Anger, Global Head of ILS Structuring, GC Securities.
To this end, the second quarter saw the successful execution of Panda Re Ltd. Series 2015-1 Notes, which represented the first bond to provide protection against a Chinese peril and the first ILS transaction issued by a Chinese sponsor. The Series 2105-1 Notes provide China Re retrocession protection against earthquake-related losses in China on an indemnity basis. China Re sought the expertise of GC Securities, the sole structuring and placement agent on the deal, for an introduction to the ILS market and for guidance in accessing the capital markets.
Another notable transaction in the second quarter of 2015 was the Alamo Re Ltd. Series 2015-1 Notes that benefitted the Texas Windstorm Insurance Association (TWIA). This transaction marked not only the largest issuance of the quarter, but also the first half of the year. The Series 2015-1 bonds were positioned alongside TWIA’s traditional reinsurance program to provide annual aggregate protection from named storms causing USD 50 million in loss to the association.
The pricing floor that was seen in the second quarter, particularly for lower expected loss catastrophe bond structures, signaled a trend that GC Securities expects to continue for the near future. This development was further evidenced by the secondary pricing of outstanding 144A P&C catastrophe bonds, which has continued to trend upward throughout the year. As of June 30, 2105, secondary pricing was sitting above the 2015 initial issuance trend curve, suggesting that investors are demanding a higher spread than the primary issuance spread in order to facilitate a trade in the secondary market. The reach for yield, even within the catastrophe bond asset class, has resulted in some investors reducing allocations to lower than expected loss deals. This should encourage sponsors to cede less remote risks to the capital markets where a pricing floor is not yet definitive.
*Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities Corp., a US registered broker-dealer and member FINRA/NFA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd. (MMCSEL), which is authorized and regulated by the Financial Conduct Authority, main office 25 The North Colonnade, Canary Wharf, London E14 5HS. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities Corp., MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product. **GC Analytics is a registered mark with the U.S. Patent and Trademark Office.