Asset AllocationOctober 15, 2013

Cat Bonds Hit Record Issuance in 2013

<em>Investors are still hungry for catastrophe risk - there is now $19 billion in outstanding risk capital.</em>

Reported by Featured Author

(October 15, 2013) — Catastrophe bonds are thriving, recording $6.24 billion in issuance so far in 2013, according to the Artemis Deal Directory.

Outstanding cat bond risk capital has reached a record high of $19 billion, Artemis found.

“The market jumped to approximately $19.4 billion in size today, with the completion of a recent deal, and now looks set to hit at least $19.6 billion in size by the end of the month, once the latest cat bond to come to market completes,” Steve Evans, owner and editor of Artemis, said.

AXA’s Calypso Capital II Ltd. was issued this week, ushering the cat bond market into the alternative asset class as a potential major player among institutional investors. The $476 million deal received a BB- (sf) rating to its class A notes and B+ (sf) rating to the class B notes from Standard & Poor’s.

Artemis said as soon as the $175 million Catlin’s Galileo Re Ltd. was issued, cat bond issuance could reach $8 billion by the end of the year.

“The pipeline for new catastrophe bond deals looks strong for the rest of the year,” Evans said. “There are a number of deals which are likely to be renewed as well as some first-time cat bond sponsors waiting to bring deals to market.”

Cat bonds emerged in the mid-1990s, after investors experienced significant losses from Hurricane Andrew in the southern states of the US. Originally created to insure insurers from catastrophes, they now attract much attention from institutional investors.

The Economist found that institutional investors have grown their appetites for cat bonds particularly due to their ability to generate high yields that are relatively uncorrelated to the markets.

However, the substantial growth of the cat bond market could have dangerous implications, The Economist said. Inexperienced investors could distort prices, “creating a frothy ‘shadow insurance’ sector with systemic implications.” Unreasonably high prices could also push investors out of the asset class, causing a drop in yields.

Despite concerns, recent figures have indicated cat bonds are here to stay.

“With as much as $50 billion of capital from institutional investors currently in the global catastrophe reinsurance market and predictions for much more capital to flow into the space over the next few years, this sector is one to watch,” Artemis stated.