As we approach the April 2015 reinsurance renewal, we look back at the Jan. 1 renewal.
Posts Tagged ‘GC Securities’
The use of capital markets-based risk transfer capacity by public entities, insurers of last resort, and compulsory catastrophe pools and disaster facilities continues to expand. These deals included Turkey’s Turkish Catastrophe Insurance Pool, Mexico’s FONDEN and New Zealand’s EQC. Most large U.S. insurers of last resort, such as CEA, Citizens (FL), Citizens (LA), North Carolina Joint Underwriting Association and the North Carolina Insurance Underwriting Association (NCJUA/NCIUA), and Texas Windstorm Insurance Association, are utilizing capital markets capacity including collateralized reinsurance and catastrophe bonds.
Here we review recent GC Capital Ideas stories focusing on (re)insurers’ capital strategies.
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.
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.