Bond & ILS Market ReportQ2 2019 Catastrophe

Repeat sponsors and risks underpin issuance

Focused on insurance-linked securities (ILS), catastrophe bonds, alternative reinsurance capital and related risk transfer markets.

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This report reviews the catastrophe bond and insurance-linked securities (ILS) market at the end of the second-quarter of 2019, looking at new risk capital issued and the composition of transactions completed during the quarter.

A total 18 deals consisting of 32 tranches of notes were brought to market in the second-quarter of 2019, resulting in approximately $3.61 billion of new risk capital, as shown by the Artemis Deal Directory. Both first and second-quarter 2019 catastrophe bond and ILS issuance declined year-on-year, but at approximately $6.4 billion, first-half 2019 issuance is still the third highest ever recorded.

For the third consecutive quarter, mortgage insurance risks featured heavily in catastrophe bond and ILS issuance, accounting for more than 50% of Q2 issuance on the back of almost a third of Q1 issuance. All four mortgage ILS deals issued in the quarter came from repeat sponsors. Returning sponsors also brought the majority of catastrophe risk to the market in the period, with Bermudian Hamilton Re being the only new sponsor to feature in Q2. As is typical of any quarter, some unknown sponsors also came to market in Q2 2019.

From the end of the first-quarter, catastrophe bond and ILS issuance has outpaced deal maturities and as such, the outstanding market at the end of the second-quarter is approximately $1.4 billion larger, at a record $39.3 billion.

Artemis is the leading, freely accessible source of timely, relevant and authoritative news, analysis, insight and data on the insurance-linked securities, catastrophe bond, alternative reinsurance capital and related risk transfer markets. The Artemis Deal Directory is the leading source of information, data and analysis on issued catastrophe bond and insurance-linked securitization transactions.

INTRO

Q2 catastrophe bond and ILS issuance featured 18 transactions and 32 tranches of notes, amounting to $3.61 billion of new risk capital.

Hamilton Re was the only new sponsor in Q2, with a $60 million issuance of a U.S. multi-peril deal. This, combined with repeat deals from Safepoint Insurance, USAA, and United P&C Insurance, saw $335 million of U.S. multi-peril risk come to market in Q2.

U.S. state specific multi-peril deals were a feature of issuance, and included the second North Carolina multi-peril deal from the NCIUA, separate Florida multi-peril deals from Security First and American Integrity, and TWIA’s latest Texas multi-peril deal.

Once again, mortgage insurance risks featured heavily, with deals from Essent Guaranty, MGIC Investment, Arch Capital, and Radian Guaranty accounting for more than $1.8 billion of Q2 issuance.

International multi-peril deals from SCOR and AXIS provided diversification and included coverage for European windstorm, U.S. named storm, and U.S. and Canada quake risks. FEMA returned with more U.S. flood risk in Q2 while Swiss Re also returned with a slice of Northeast U.S. named storm risk. Combined, just under $30 million of unknown and U.S. prop cat risks featured in Q2.

Transaction Recap

ISSUER / TRANCHE SPONSOR PERILS SIZE

($M)

DATE

Northshore Re II Ltd. (Series 2019-1) AXIS Capital Holdings Ltd. International multi-peril 165 Jun

Radnor Re 2019-2 Ltd. Essent Guaranty Mortgage insurance risks 333.844 Jun

Cerulean Re SAC Ltd. (Easton 2019-1) Hamilton Re U.S. multi-peril 60 Jun

Matterhorn Re Ltd. (Series 2019-1) Swiss Re Northeast U.S. named storm 250 Jun

Cape Lookout Re Ltd. (Series 2019-2) North Carolina Insurance Underwriting Association

North Carolina multi-peril 100 Jun

Dodeka XXIII Unknown U.S. prop cat risks 9.33 Jun

Atlas Capital UK 2019 PLC (Series 2019-1)

SCOR Global P&C SE International multi-peril 250 May

Home Re 2019-1 Ltd. MGIC Investment Corp. Mortgage insurance risks 315.8 May

Integrity Re Ltd. (Series 2019-1) American Integrity Insurance Florida multi-peril 50 May

Alamo Re Ltd. (Series 2019-1) Texas Windstorm Insurance Association

Texas multi-peril 200 May

First Coast Re II Pte. Ltd. (Series 2019-1) Security First Insurance Florida multi-peril 100 May

Manatee Re III Pte. Ltd. (Series 2019-1) Safepoint Insurance U.S. multi-peril 40 May

Residential Reinsurance 2019 Limited (Series 2019-1)

USAA U.S. multi-peril 135 May

Armor Re II Ltd. (Series 2019-1) United P&C Insurance & subsidiaries

U.S. multi-peril 100 May

Eclipse Re Ltd. (Series 2019-01A) Unknown Unknown prop cat risks 20 Apr

Bellemeade Re 2019-2 Ltd. Arch Capital Group Ltd. Mortgage insurance risks 621.07 Apr

FloodSmart Re Ltd. (Series 2019-1) FEMA / NFIP via Hannover Re U.S. flood risk (named storms) 300 Apr

Eagle Re 2019-1 Ltd. Radian Guaranty Mortgage insurance risks 561.982 Apr

300

250

200

150

100

50

0

35

30

25

20

15

10

5

0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Q2

Q2 ILS issuance by year ($M)

At $3.61 billion, catastrophe bond and ILS issuance in the second-quarter of 2019 is above the ten-year average for the quarter. As is typical in the opening six months of the year, issuance in the second-quarter exceeded first-quarter issuance, and by more than $836 million in 2019.

ILS average transaction size & number of transactions by year ($M)

Representing a slowdown from the extremely active Q2s in both 2017 and 2018, just 18 transactions came to market in the second-quarter of 2019. However, this is still above the ten-year average of 16 transactions. At $201 million, the average transaction size of Q2 2019 issuance is below the ten-year average of $208 million, but is in line with that of Q2 2018.

TransactionsAvg. Size

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7000

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1000

02010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Q2

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Number of transactions and volume issued by month ($M)For the first time since 2013, issuance in the month of April outpaced May issuance, in terms of new risk capital issued. Typically, May is the most active month of the second-quarter, but at more than $1.5 billion, April issuance was roughly $300 million higher than the $1.2 billion witnessed in May. In line with the ten-year trend, June issuance was the lowest of the quarter, at $918 million.

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1400

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0

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0Apr - 19 May - 19 Jun - 19

$ millions Transactions

Q2 issuance by month & year ($M)Despite being the most active month of the second-quarter in terms of new risk capital issued, in terms of the number of transactions issued, April was actually the least active month, with four deals. Six deals came to market in June, while the month of May was the busiest month of the second-quarter in terms of the number transactions, when eight came to market.

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0

Intelligent and insightful offshore legal advice and services.Delivered with perspective.

We are an award-winning team with a track record of advising clients on the most innovative and market leading deals and structures. Our distinguished insurance and reinsurance practice is praised for its in-depth understanding of the industry and long-standing experience in the market.

To learn more about our legal expertise, please contact:

Tim Faries Managing Partner, Bermuda Group Head, Bermuda | Corporate Group Team Leader | Insurance+1441 298 3216 tfaries@applebyglobal.com

Apr May Jun

Intelligent and insightful offshore legal advice and services.Delivered with perspective.

We are an award-winning team with a track record of advising clients on the most innovative and market leading deals and structures. Our distinguished insurance and reinsurance practice is praised for its in-depth understanding of the industry and long-standing experience in the market.

To learn more about our legal expertise, please contact:

Tim Faries Managing Partner, Bermuda Group Head, Bermuda | Corporate Group Team Leader | Insurance+1441 298 3216 tfaries@applebyglobal.com

Q2 2019 ILS issuance by trigger type

Similar to the same period in 2018, second-quarter 2019 catastrophe bond and ILS issuance lacked trigger diversification, featuring only indemnity and industry loss index structured transactions, as shown by the Artemis Deal Directory.

Indemnity

Unknown

Industry loss index

At just below $2.9 billion, indemnity protection accounted for around 79% of second-quarter issuance in 2019. Almost $734 million, or roughly 20% of issuance featured an industry loss index trigger, while we do not have trigger information for almost 1%, or $20 million of second-quarter 2019 issuance.

Q2 2019 ILS issuance by peril

Mortgage insurance risks accounted for more than half of catastrophe bond and ILS issuance. And at a combined $1.8 billion, deals from Arch, Essent Guaranty, Radian Guaranty, and MGIC ensured mortgage insurance risk featured heavily for the third consecutive quarter.

Despite the dominance of mortgage risks, in Q2 2019, catastrophe bond and ILS investors were treated to catastrophe risk diversification. Supporting a trend of more state-specific deals, $100 million of North Carolina multi-peril risk came to market in Q2, alongside $200 million of Texas and $150 million of Florida multi-peril risk. $250 million of Northeast U.S. named storm risk also featured in Q2, as did $300 million of U.S. flood risk and $335 million of U.S. multi-peril risks, and almost $10 million of U.S. property catastrophe risks.

$415 million of Q2 issuance offered protection against multiple international perils, including U.S. and Canada earthquake, European windstorm and U.S. named storms, including Puerto Rico and the Virgin Islands. $20 million of Q2 2019 issuance offered protection against unknown property catastrophe risks.

Northeast U.S. named storm

North Carolina multi-peril

International multi-peril

Texas multi-peril

U.S. multi-peril

Florida multi-peril

U.S. property catastrophe risks

Unknown property catastrophe risks

U.S. flood risk (from named storms)

Mortgage insurance risks

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v

39% 20%

v

5

v

31%

v

12%

v

26%

v

9%

v

3

Q2 2019 ILS issuance by coupon pricing

Where we have pricing data (this amounts to $2.86 billion of total risk capital issued), 31%, or $896 million of Q2 2019 issuance offered a coupon of less than 2%. Over 37%, or $1.1 billion of issuance paid investors a coupon of between 2.01% and 6% in the quarter, while 12% of issuance had a coupon of between 6.01% and 10%. More than 19% of Q2 issuance paid a coupon of above 11%, including the Class B tranche of FloodSmartRe notes, which had the highest coupon, of 14.5%. The lowest coupon on offer, at 1%, came from the M-1A tranche of Bellemeade Re notes.

Q2 2019 ILS issuance by expected loss

For the $1.59 billion of total risk capital issued that we have expected loss data for, 59%, or $945 million had an expected loss of between 1% and 4%, with the majority of this offering an expected loss of between 1% and 2%. Roughly 5% of issuance had an expected loss of less than 1%, while 33%, or $520 million had an expected loss of between 4% and 6%. $50 million, or roughly 3% of issuance had an expected loss over 6%. At 6.01%, the Class B tranche of FloodSmartRe notes from FEMA were the riskiest on offer. While the Class 13 tranche of Residential Re notes had the lowest expected loss in Q2, at 0.98%.

0.01% - 1%

0.01% to 2%

2.01% - 4%

4.01% to 6%

4.01% - 6%

6.01% to 8%

6.01%+

8.01% to 10% 11.01%+

1.01% - 2%

2.01% to 4%

33%

19%

3

16

14

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10

8

6

4

2

0

Pricing multiples of Q2 2019 issuance

In spite of a decline from the end of the first-quarter, the average multiple (price coupon divided by expected loss) of Q2 2019 issuance, where we have full pricing data, improved year-on-year, to 2.64.

As shown by the Artemis Deal Directory, the average multiple of catastrophe bond and ILS issuance struggled to stay above 2 throughout last year. However, after declining in Q4 2018, the average multiple improved substantially to 3.65 in Q1 2019, and, has continued to recover in the second-quarter after a lacklustre 2018.

Expected Loss Pricing Multiple

Norths

hore

Re II L

td.

(Seri

es 20

19-1

)

Norths

hore

Re II L

td.

(Seri

es 20

19-1

)

Matterh

orn R

e Ltd.

(Seri

es 20

19-1

)

Cape L

ooko

ut Re L

td.

(Seri

es 20

19-2

)

Atlas C

apita

l UK 20

19 P

LC

(Seri

es 20

19-1

)

Integ

rity R

e Ltd.

(Seri

es 20

19-1

)

Alamo R

e Ltd.

(Seri

es 20

19-1

)

Manate

e Re I

II Pte.

Ltd.

(Seri

es 20

19-1

) Clas

s A

Manate

e Re I

II Pte.

Ltd.

(Seri

es 20

19-1

) Clas

s B

Reside

ntial

Reinsu

rance

2019

Limite

d

(Seri

es 20

19-1

) Clas

s 12

Reside

ntial

Reinsu

rance

2019

Limite

d

1(Se

ries 2

019-

1) C

lass 1

3

Armor

Re II L

td. (S

eries

2019

-1)

Flood

Smart

Re L

td. (S

eries

2019

-1) C

lass A

Flood

Smart

Re L

td. (S

eries

2019

-1) C

lass B

Norths

hore

Re II L

td.

(Seri

es 20

19-1

)

Matterh

orn R

e Ltd.

(Seri

es 20

19-1

)

Cape L

ooko

ut Re L

td.

(Seri

es 20

19-2

)

Atlas C

apita

l UK 20

19 P

LC

(Seri

es 20

19-1

)

Integ

rity R

e Ltd.

(Seri

es 20

19-1

)

Alamo R

e Ltd.

(Seri

es 20

19-1

)

Manate

e Re I

II Pte.

Ltd.

(Seri

es 20

19-1

) Clas

s A

Manate

e Re I

II Pte.

Ltd.

(Seri

es 20

19-1

) Clas

s B

Reside

ntial

Reinsu

rance

2019

Limite

d

(Seri

es 20

19-1

) Clas

s 12

Reside

ntial

Reinsu

rance

2019

Limite

d

1(Se

ries 2

019-

1) C

lass 1

3

Armor

Re II L

td. (S

eries

2019

-1)

Flood

Smart

Re L

td. (S

eries

2019

-1) C

lass A

Flood

Smart

Re L

td. (S

eries

2019

-1) C

lass B

Final PricingLaunch Price Range

Cat bond and ILS price changes during Q2 2019 issuance

For the $1.59 billion of risk capital issued where we have full pricing data, the average price change in the second-quarter of 2019 was 1.85%. One tranche of notes priced exactly at the mid-point of initial price guidance, while just three tranches priced below the mid-point. Nine tranches of notes priced above the mid-point of initial price guidance, with the most dramatic price increase being seen with the Class A tranche of Manatee Re II notes, which increased by 10.52% while marketing.

%15

14

13

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11

10

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8

7

6

5

4

3

2

1

0

Issued / Outstanding

On the back of a solid but muted start to the year, catastrophe bond and ILS issuance in the second-quarter of 2019 remained robust. Despite first-half issuance levels being down by more than $3 billion, year-on-year, the approximately $6.4 billion of new risk capital issued this year has taken the outstanding market to a new high, ending the quarter at $39.3 billion.

Overall, the market once again achieved outright growth in the second-quarter of 2019, but it’s worth highlighting the growing influence of mortgage ILS deals, especially over the last 18 months. Artemis’ data shows that mortgage ILS issuance is near $2.7 billion so far in 2019, which accounts for roughly 42% of 2019 issuance. The average size of these deals suggests that it will only take one more deal to feature this year for annual mortgage issuance to reach a new high.

Despite the clear influence of mortgage risk, catastrophe risk-focused issuance remains solid and new sponsors, risks, and geographies continue to provide the sophisticated investor base with welcomed diversification.

a

According to the Artemis Deal Directory, just over $3 billion of catastrophe bond and ILS transactions are scheduled to mature in the second-half of the year. Artemis’ data shows that over the past ten-years, issuance has averaged $2.9 billion in the second-half of the year, which suggests that market growth might well continue in 2019.

If you want to see full details of every catastrophe bond and ILS transaction

included in the data in this report please visit www.artemis.bm/deal_directory/+

2019

2018

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1997

$ Issued $m Outstanding $m40000

38000

36000

34000

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30000

28000

26000

24000

22000

20000

18000

16000

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12000

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0

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All catastrophe bond and ILS issuance data sourced from the Artemis Deal Directory.

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