As we find ourselves reeling from a series of catastrophic natural disasters, now seems like a good time to take stock of the catastrophe bond market so far this year.
For those of you who may be unaware, 2017 has been a remarkable year in the space with USD 7.85 billion of public 144A issuance by August 1. To add some context to this number, the highest full-year issuance amount the market has experienced is the USD 8.03 billion seen in 2014. While the market has calmed a bit since the first of August, to be approaching an annual record when we have several months left in the year is quite an achievement, and has required a great deal of hard work from all market participants.
This surge of issuance has been met with strong investor demand as deals consistently see either an upsizing in the principal, a reduction of pricing guidance, or a combination of the two. These soft market conditions have allowed sponsors to gain not only favorable pricing, but also favorable terms.
A great example of this is Lion II Re DAC, which saw Generali return to the catastrophe bond space after the success of Lion I Re Ltd. While Lion I covered European windstorm, its successor was expanded in both size and domain as it grew to include Italian earthquake and European flood—the first 144A cat bond ever to include this peril. Despite the inclusion of a new peril that in some countries is still not modeled, Lion II Re DAC was able to set a new market low for the expected loss to coupon multiple, set at 1.34x.
Later in the year, we saw the World Bank’s Pandemic Emergency Financing Facility (PEF) test investors’ appetites to move outside the traditional property business that is the typical realm of cat bonds. This is a parametric deal (IBRD CAR Series 111 and Series 112) that is triggered by World Health Organization (WHO) reported deaths and cases of pandemic flu. Undeterred by this new peril and reporting agent, investors placed orders that saw the deal upsize from an initial target of USD 100 million to a final total of USD 325 million, with pricing also finalized below the initial guidance range. The deal represents an innovation in the peril covered, and offers a means for the World Bank to help finance cost effective disaster prevention efforts in countries that desperately need them—a tool that could potentially be used to further close the protection gap.
AIR was selected to fill the role of “expert modeler” for both of these transactions, as well as a further 18 transactions (comprising 44 classes of notes) in the first half of this year. These deals represent an issuance amount of USD 5.38 billion, the greatest half-year amount recorded by any modeling agent since the market began. To see two of AIR’s more recently released models (European flood and pandemic) accepted by investors in the risk analysis of catastrophe bonds was a satisfying moment, and we hope that our continuous expansion of regions and perils offers the chance for both private and public sponsors to continue seeking protection from the capital markets.
Whether or not the market can maintain this pace and how recent events may impact future issuances and innovation remain to be seen, but if the first half of 2017 is anything to go by, the outlook for the catastrophe bond space looks promising.
