Fitch: Continued Growth in State/Government CAT Bonds Expected

Continued growth in catastrophic risk (CAT) bonds from state- and government-sponsored insurance organizations is expected this year, according to Fitch Ratings. Investor demand remains considerable and the cost of sponsoring a CAT bond has continued to converge with the cost of ceding risk to the traditional reinsurance markets.

The market has experienced a significant influx of deals from repeat sponsors such as Citizens Property Insurance Corp. (FL Citizens), Louisiana Citizens and the North Carolina JUA/IUA over the past five years. Continued growth is expected to remain for these types of sponsors in the U.S., as well as internationally.

Well-structured CAT bond deals are becoming a practical solution in the higher risk portions of sponsor reinsurance programs, which is expected to drive further issuance in 2014. Continued U.S. growth is expected to come from repeat sponsors looking to expand their use of the capital markets as well as from international organizations presented with increasingly innovative and viable risk transfer alternatives. The availability of potential sponsors in the U.S. will be moderated by the limited number of state wind pools and other publicly sponsored catastrophe insurance organizations now operating.

Three outstanding catastrophe bonds totaling $1.1 billion are set to mature in 2014, anchored by the single largest catastrophe bond in history: a $750 million issue sponsored by FL Citizens (Everglades Re - 2012), which represents a sizable portion of the company's reinsurance tower. Investor demand for higher yielding property catastrophe risk below the top layer of the sponsor's reinsurance programs has remained strong, illustrated by the subsequent issue sponsored by FL Citizens in 2013 that attaches ahead of the previous deal.

Issuance from state and government sponsors increased steadily over the past decade, with particular acceleration in recent years. Since 2001, $5.0 billion of state/government sponsored catastrophe bonds have been issued, with approximately 64% of those issued over the past two years. Approximately $1.5 billion of the bonds were issued in 2013, tripling the level of annual issuance that was experienced as recently as in 2011.

The majority of outstanding bonds are focused on U.S. hurricane and earthquake risk as these perils have been the most thoroughly modeled and widely understood to date. State and government sponsors have predominately gravitated towards utilizing indemnity triggers as they limit basis risk with payouts that correspond with actual loss experience. 70% of the $3.7 billion of outstanding issuances by state/government sponsors utilize an indemnity trigger. Over the last two years, the only deals that utilized parametric or modeled loss triggers were unique risks for the market with less historical modeling experience. They include Bosphorus 1 Re (Turkish earthquake), Multicat Re (Mexico earthquake/hurricane), MetroCat Re (Storm surge) and Golden State Re (Workers compensation).

The North Carolina JUA/IUA has come to the capital markets four times, more than any other sponsor of this type, gradually increasing the size of the issues it sponsors over time. The organization's most recent sponsor opportunity came in 2013 through Tar Heel Re and was significantly oversubscribed, doubling in size during the marketing phase to finalize as one of the larger cat bond transactions ever at $500 million, again emphasizing strong investor demand.

The $400 million issuance in 2013 sponsored by the Turkish Catastrophe Insurance Pool (Bosphorus 1 Re Ltd.) was a significant step for the international market. It is the second outstanding publicly sponsored non-U.S. catastrophe bond, following the MultiCat Mexico Ltd. series sponsored by the Fund for Natural Disasters in Mexico.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Christopher A. Grimes, CFA, [phone]
Associate Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Jeffrey A. Mohrenweiser, CFA, [phone]
Senior Director
Insurance
or
Kellie Geressy-Nilsen, [phone]
Senior Director
Fitch Wire
One State Street Plaza
New York, NY
or
Media Relations:
Brian Bertsch, [phone]
[e-mail]