Eight catastrophe bond transactions were completed in the second quarter of 2010, with USD2.05 billion in risk capital coming into the market — making it the second-most active second quarter on record. Of this total, USD1.7 billion (and all but one transaction) included exposure to U.S. wind, as sponsors and investors focused on this peril.
Activity was up significantly compared to the same period in 2009. The number of bonds issued increased 33 percent year-on-year (up from six bonds in the second quarter of 2009), and risk capital issued jumped by 154 percent from the USD808 million issued during the second quarter of 2009.
For the first half of 2010, a total of 10 catastrophe bonds were issued, generating risk capital of USD2.35 billion. This compared favorably with the first half of 2009, when nine transactions were completed, resulting in USD1.38 billion issued. From the first half of 2009 to the first half of 2010, risk capital issued rose by 70 percent.
Catastrophe Bond Arrangers
Throughout the first half of 2010, there has been a shift in the percentage of risk capital that has been placed by broker-dealer affiliates of reinsurance brokers. Prior to 2007, investment banks largely dominated cat bond issuance, with broker-dealer affiliates of reinsurance brokers placing no more than 30 percent of cat bonds (in terms of risk capital) in any single year. Since 2007, sponsors of cat bonds have increasingly recognized the value brought by broker-dealer affiliates of reinsurance brokers.* In the first half of 2010, the percentage of risk capital issued arranged by broker-dealer affiliates of reinsurance brokers as deal managers was more than 90 percent. (Only one deal did not have a broker-dealer affiliate of a reinsurance broker in the dealer group.)
Risk Capital Outstanding
Despite the strong recovery in cat bond activity during the second quarter of 2010, total risk capital outstanding declined USD105 million to USD11.82 billion as the USD2.05 billion of new issuance was outstripped by USD 2.16 billion of maturities. This is the second consecutive quarter of declining risk capital outstanding. An additional USD1.92 billion of risk capital is scheduled to mature before the end of 2010. Yet, although not all of this maturing risk capital has flowed back into the hands of active catastrophe bond investors, demand for new issuance remains robust.
Industry Loss Warranties
Compared to the first quarter of 2010, industry loss warranty (ILW) negotiations and trading picked up significantly in the second quarter. Reinsurers, reluctant to retain additional potential losses after the disasters in Chile, Australia and offshore energy books, began looking for ways to enhance and supplement existing reinsurance protections. Initially, this prompted a sharp increase in traded volumes in late April and May and a rate hardening of 10 percent after a sustained period of softening since early 2009. Protection buyers generally were able to find protection sellers at these increased rates.
Outlook for Remainder of 2010
The catastrophe bond market outlook for the third quarter and fourth quarter of 2010 is entirely subject to catastrophe activity - in particular, the number and severity of landfalling hurricanes in the United States. However, assuming no market-moving events occur, and based on the existing pipeline and consideration of scheduled maturities, a total year issuance in 2010 of USD4 billion to USD6 billion (implying additional issuance in the second half of 2010 of USD1.7 billion to USD3.7 billion) is a reasonable estimate.
* Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities Corp., a US registered broker-dealer and member FINRA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd., which is authorized and regulated by the Financial Services Authority. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities Corp., MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product.