Pricing levels for first quarter 2015 deals will be influenced by the number of bonds maturing during the period. January alone will see USD2.3 billion of principal returned to investors as ten transactions have or are set to mature (absent any triggering event). Additionally, another USD1.24 billion of capital will be returned to investors in February and March, taking the total notional value of first quarter 2015 maturities to USD3.54 billion. Such maturities in the insurance-linked securities (ILS) space in the first half of 2015, which has the highest percentage of outstanding cat bonds as of the end of the preceding year since 2011, is expected to provide further pressure to lower ILS pricing.
Posts Tagged ‘Capital Markets’
In addition to 144A transactions, the fourth quarter was an active one for the private cat bond market (Regulation D, Regulation S and Rule (4(2)) securities offerings). The terms and conditions of such securities are typically confidential due to the private nature of the issuance, unless the sponsors or the placement agents publicize information about the transactions. As of December 31, 2014 approximately USD561.5 million of limit was transferred to the capital markets via 17 transactions. These figures represent a 210 percent increase in the notional amount of limit placed year-over-year, and a 183 percent increase in the number of transactions year-over-year.
Eighty-nine percent of property and casualty (P&C) risk capital (based only on 144A cat bond transactions) had a bond tenor of either three or four years in 2014, a decrease from 93 percent in 2013. This was due to increased usage of risk periods longer than four years. This was largely influenced by Sanders Re 2014-1, a USD300 million five year transaction benefiting Allstate (Q2) and Kilimanjaro Re 2014-2, a USD500 million five year transaction benefiting Everest Re (Q4). Investors were receptive to longer-term transactions (a position we expect will continue into 2015) as both deals were oversubscribed. However, such deals closed either above or at the midpoint of initial price guidance, indicating that investors required additional compensation for risk periods longer than four years. Sponsors continued to express interest in bonds with risk periods beyond five years, which we expect will persist through 2015 and beyond.
Eighty-one percent of the property and casualty (P&C) risk capital (based only on 144A cat bond transactions) was structured with an indemnity trigger on either a per-occurrence, annual aggregate or multi-year aggregate basis. The use of indemnity triggers increased steadily from a low of 30 percent in 2011 to 55 percent in 2013.
The continued influx of third party capital from new and existing market participants also favorably impacted insurance-linked securities (ILS) pricing for protection buyers. The continued low interest rate environment encouraged institutional investors (such as pension funds and hedge funds) to seek the higher yields offered by natural cat risk notes. As a result, sponsors took advantage of the opportunity to lock in attractive rate on line and essentially, hedge rate volatility.
After one of the slowest third quarters to date for 144A property and casualty (P&C) catastrophe bond issuance, the fourth quarter saw a flurry of activity that resulted in full year 144A P&C cat bond issuance exceeding USD8 billion - an industry record. Total risk capital outstanding as of December 31, 2014 equaled USD22.868 billion, the highest level of outstanding risk capital the market has ever supported.
The table lists the top ten catastrophe bond transactions that were completed in 2014.
A collateralized reinsurance transaction is one in which a market creates a trust account at the inception of the contract term and funds the account in an amount equal to the contract limit (less certain deductions). This funding mechanism provides the client with readily accessible funds in the event of a loss that are segregated from the other assets of the market and remains available even if the market becomes insolvent. A collateralized reinsurance transaction also requires a pre-negotiated release of assets in the trust fund back to the market if there are no losses or if loss development is less than the contract limit.
Guy Carpenter helps our clients manage the specific counterparty risk elements associated with collateralized markets. The credit analysis of collateralized markets is different than the analysis of a traditional reinsurer.