The catastrophe bond market demonstrated critical resiliency during 2019 and delivered ample capacity at a time when it was most needed, according to Shiv Kumar, CEO of MMC Securities.
USD 5.3 billion of catastrophe bonds were issued across 22 deals by 20 sponsors. In the fourth quarter alone, six bond transactions priced, sourcing USD 2.3 billion of capacity. While several industry index trigger deals served as a substitute for constrained retrocessional capacity, the market also saw a range of indemnity, regional and public sector transactions. Risk spread increases tended to be between 10 to 20 percent compared to year-end 2018 levels, with a wide variance depending on the absolute risk level, trigger structure, peril contribution and transaction timing.
As we head into 2020, there is a renewed appreciation among capital providers for the transparency, liquidity and structural rigor of the 144A catastrophe bond product as compared to other conduits for accessing insurance risk premium. Consistent with the rest of the reinsurance market, the catastrophe bond product is undergoing some degree of structural tightening with respect to terms, conditions and coverage mechanics. For example, there is a sharper focus on the inclusion, modeling and price adequacy of “secondary” perils such as wildfire and tornado / hail, loss adjustment expenses and other social inflation. Still, the catastrophe bond market has been quite disciplined historically and never loosened its standards to the same degree as some other products which have sustained more significant losses recently. A substantial number of bonds are maturing during the first two quarters of 2020 and we expect the issuance calendar to be quite robust.
The overall sidecar capacity declined last year as 2019 losses, combined with continued loss deterioration from 2017 and 2018 events, eroded or trapped capital for the third year in a row. There were also redemptions at a few large capacity providers and certain investors significantly reduced allocations or exited from illiquid strategies altogether. As investors prioritized participation on better performing programmes, sponsors responded by accommodating them on commission levels, deficit carry forward and rollover provisions as appropriate. We anticipate that capital inflows will resume in 2020 from many existing investors as well as a number of new institutions.
Despite heavy catastrophe losses in the previous two years, we saw good participation from the collateralized market in 2019. Most of these markets focused on region/peril specific opportunities to capture the market hardening in Florida wind or California wildfire programs. Cedent quality was prioritized over pricing, especially in Florida where markets underwrote to loss adjusted expense management and assignment of benefit claims count rather than purely the headline premium level. We expect this trend to continue in 2020 as the market is still dealing with loss creep issues from Hurricanes Irma and Michael. We transformed seven programs in 2019 as both cedents and markets felt more comfortable with the standardized documentation and efficient risk transformation services of our Cerulean Re platform. In 2020, we plan to offer another transformer platform called Isosceles Re which will provide additional flexibility for 4(2) issuance.
Private Capital/Surplus Notes
Surplus notes have become an increasingly popular source of capital for property and casualty (P&C) insurers looking to diversify their capital structure while capturing improved pricing and organic growth opportunities. Issuers are locking in low rates for extended durations and obtaining corresponding capital credit from the rating agencies. The number of P&C insurers utilizing surplus notes has grown from 175 in 2004 to 223 as of September 30, 2019. Most of this growth is driven by small-to-mid size P&C insurers with less than USD 1 billion of capital. Increased product awareness, growing interest in mutual companies, demand for long-duration paper and desire for portfolio diversification are generating strong investor appetite for surplus notes.
The mortgage insurance-linked note (ILN) market has grown quite robustly in the past five years. There was USD 4.5 billion of issuance across 10 transactions from six sponsors in 2019 taking the aggregate ILN issuance to USD 8.6 billion. It was the most active year to date. Genworth, the only private mortgage insurer to not have issued an ILN, entered the market in November with its Triangle Re deal. It is interesting to note that while the insurance-linked securities (ILS) products are seeing a tightening of terms, the mortgage ILN product is evolving to be more issuer friendly. For example, government sponsored enterprises and NMI were able to push down the attachment points while the spreads on junior tranches were compressing meaningfully. With interest rates at historically low levels and substantial refinancing activity underway, we expect that the mortgage ILN market will remain on its strong growth trajectory in 2020.