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Catastrophe Bond Issuance

September 20, 2017

Written by Gabriela Pallicer, Dealogic Research

Catastrophe bond issuance breaks records

This Atlantic hurricane season is exceptionally busy, having already seen four major (category 3 or higher) storms, and has shone a spotlight on catastrophe bonds (or cat bonds). They are a vehicle that insurance companies can use to transfer some of their financial risk to capital markets, in particular to yield-seeking investors, in the case of a catastrophic event. Cat bonds have been especially attractive in the current low-rate environment as they offer higher interest, drawing in pension funds, endowments, and wealthy families.

With over $6bn of cat bonds maturing in the first half of 2017 and a strong demand for new issuance to replace the maturing capital, US-marketed cat bonds broke both half-year and quarterly records this year. Such deals reached $8.2bn issued via 27 deals this YTD, driven by a record second quarter with $6.4bn via 21 cat bonds—surpassing the previous quarterly record of $4.3bn via 13 deals in Q2 2014.

Impact of Hurricanes Harvey and Irma

As the US faces the devastating aftermath of its worst hurricanes in over a decade, collective estimates for damages are reaching around $200bn for Texas and Florida. $27.0bn in outstanding cat bonds are potentially at risk, with as much as $15.8bn of this amount having some level of exposure to Harvey, Irma, or other named storms in the US.

Although there is no clear picture yet for which cat bonds will be triggered by the combined impact of Harvey and Irma, some notable bonds at high risk are the $300m Galileo Re (Series 2015-1) linked to potential losses from US named storms, the $278m Citrus Re (Series 2015-1) linked to potential losses from Florida named storms, and the $700m Alamo Re (Series 2015-1) linked to potential losses from storm risks in Texas.

Can the market weather more losses?

Despite suffering its worst day on Friday, September 8—dropping by 16% in the secondary market according to the Swiss Re Cat Bond Price Return Index—the cat bond market is unlikely to be completely deserted by investors, since periodic losses are expected with these types of high-risk securities. The current stormy hurricane season is also far from over (typically not until November), with Jose and Maria well underway and climate change bringing more frequent, intense hurricanes. The increased risk of principal losses will push investors to want higher interests in order to remain active in the market, which will likely lead to a change in how cat bonds operate.


Data source: Dealogic, Swiss Re (Cat Bond Price Return Index), as of September 19, 2017