Bermuda-domiciled deals drove cat bond activity in the second quarter of the year, although activity overall was down on previous second quarter periods.
Despite strong activity in Q2 largely driven by Bermuda domiciled deals, the report, Catastrophe Bond Update: Second Quarter 2015, discovered aggregate volume was lower than the previous two second quarters. For the second quarter of 2015, aggregate volume dropped to $2.5 billion, compared with $3.3 billion in 2013 and $4.5 billion in 2014.
Some of the most notable deals of the quarter were domiciled in Bermuda. These included the $50 million Panda Re Ltd. Series 2015-1 Notes, which represented the first bond to provide protection against a Chinese peril and the first ILS transaction issued by a Chinese sponsor. And the $700 million Alamo Re Ltd. Series 2015-1 Notes that benefitted the Texas Windstorm Insurance Association (TWIA). This transaction marked not only the largest issuance of the quarter, but also the first half of the year.
There were some notable highs for the market in the quarter. Private catastrophe bond issuance rose to its highest levels yet in the second quarter and primary issuance levels were at their fourth highest second quarter on record, according to the report.
“That said, the investor base continued to embrace new sponsors and perils despite the emergence of a pricing floor, as demonstrated by the second quarter new issuances,” said GC Securities.
The investor base also supported significant growth in private catastrophe bonds, with nine deals made in the second quarter, representing $556.3 million of risk capital and outpacing growth in the 144A catastrophe bond market.
Cory Anger, global head of ILS structuring, GC Securities, said: “We continue to see high demand among ILS investors for non-traditional diversifying exposures, which has encouraged new sponsors to evaluate alternative capital for protection in new regions not currently accessing the alternative capital and catastrophe bond markets.”
The pricing floor seen in the second quarter signalled a trend that GC Securities expects to continue for the near future. This development was further seen by the secondary pricing of outstanding 144A P&C catastrophe bonds, which has continued to trend upward throughout the year.
Secondary pricing was sitting above the 2015 initial issuance trend curve, as of June 30, 2105, which suggests investors are demanding a higher spread than the primary issuance spread in order to assist a trade in the secondary market.
GC Securities said: “The reach for yield, even within the catastrophe bond asset class, has resulted in some investors reducing allocations to lower than expected loss deals. This should encourage sponsors to cede less remote risks to the capital markets where a pricing floor is not yet definitive.”
GC Securities, Cory Anger, North America