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DEC 26, 2013 4:27pm ET

Catastrophe Bonds Outstanding Reach New High

DEC 26, 2013 4:27pm ET
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The catastrophe bond market experienced near-record issuance in 2013, leading to an all-time high level of outstandings of just over $20 billion, according to Fitch Ratings.

There has been approximately $7 billion of global CAT issuance in 2013, just short of the all-time record set in 2007 of $7.6 billion. In 2013, the market also experienced a 22% increase in issuance over the prior year.

Demand is underscored by new issues that have been consistently oversubscribed, with many experiencing 10%-20% growth above their initial offering size, the ratings agency said in a recent report.

Catastrophe bonds help insurers transfer the risk that they will have to pay a large amount of claims in the event of a natural disaster. If certain triggers are met, the insurer may stop paying interest or even hold on to the principal of the bonds, using these funds to pay claims.

As investor demand has grown, sponsors have been able to offer deals at considerably lower coupon rates and with increasingly favorable structures that suit individual company needs, Fitch stated in the report. “As deals have leaned further in favor of sponsors, continued strong demand for a diversifying set of risks remains the key driver of the thriving CAT bond market.”

Investor demand will remain strong in 2014, particularly for geographically diversifying perils, Fitch expects. That's likely to drive further issuance of CAT bonds in the near term if insurers believe they can produce a cost-effective alternative to supplement their reinsurance program.

Most of the focus of the CAT bond market remains on model-driven property risks, in particular U.S. peak zone risk. Investors remain significantly exposed to U.S. hurricane exposure, with approximately 72% of the outstanding CAT bond market currently exposed to U.S. wind damage, compared with only 45% in 2003.

While the majority of issuances in 2013 included coverage for U.S. hurricane risk, they also covered other perils, including U.S. and Canada earthquakes, Turkey earthquake, Australia cyclones and U.S. thunderstorms and winter storms.

“Non-U.S. catastrophe risk tends to be more fragmented and not as easily modeled and, thus, is less commoditized. CAT bond issues that include non-U.S. risks as qualifying triggers offer investors additional diversification of both perils and regions that remains highly sought after,” the report stated. In 2013, $2.8 billion of new CAT bond issuance included triggers for events occurring in markets outside the U.S., representing 40.1% of all issuance during the year, which was a slight increase over the past few years.

Thirty different sponsors of CAT bonds came to market during the year, including 11 that were first-time sponsors. The list includes both traditional insurer sponsors such as First MutualTransportation Assurance Co. (MetroCat Re), New Jersey Manufacturers Insurance Group (Sullivan Re) and state- or government-sponsored entities such as Citizens Property Insurance (Everglades Re) and the Turkish Catastrophe Insurance Pool (Bosphorus 1 Re).

Long-time sponsors American International Group, Nationwide Mutual and USAA each went to market as sponsors twice in 2013.

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