Catastrophe Bond Update: Third Quarter 2010 – Activity (and Great Expectations) Persists, Part I: Issuance, Redemptions
From the standpoint of catastrophe bond issuance, the third quarter of 2010 was consistent with historical cat bond market precedent. Following a second quarter of eight transactions and USD2.05 billion of issuance, activity was light as two transactions closed (the same number of transactions as in the third quarter of 2009), generating USD232 million of risk capital (1). Both transactions were received positively and were in fact over-subscribed. Issuance, however, was outstripped by significant maturities of existing catastrophe bonds prompting risk capital outstanding to decline seven percent over the course of the third quarter. At quarter end risk capital outstanding stood at USD10.99 billion, roughly equal to mid-year 2006. Market sentiment remains positive as catastrophe bonds (and catastrophe risk generally) as an asset class is clearly on the rise.
Cash flows from maturing bonds, net new inflows and a competitive reinsurance pricing environment continue to improve capacity available in the cat bond market and apply downward pressure to spreads. These conditions are expected to prompt significant issuance across peak, non-peak and diversifying perils over the balance of 2010 and during 2011. The fourth quarter of 2010 is expected to be active and issuance for the 2010 calendar year should exceed 2009’s total of USD3.4 billion. Activity for the full 2010 calendar year is expected to fall within, though likely towards the lower bound of, GC Securities’ existing guidance of USD4 billion to USD5 billion.
Risk capital issued in the third quarter declined 56 percent from the third quarter of 2009. Last year, two transactions resulted in USD412 million in risk capital issued, while this year, only USD232 million of risk capital (2) was issued, also through two transactions.
The first transaction to close during the third quarter was Shore Re Ltd., on which GC Securities acted as sole bookrunner and co-lead manager. This transaction provides first time sponsor Massachusetts Property Underwriting and Insurance Association (MPIUA) with multi-year fully collateralized protection for hurricanes causing covered losses in Massachusetts. Shore Re Ltd. was welcomed by cat bond investors principally due to its exposure profile (it was the first transaction to offer access to single state hurricane exposure in the Northeast United States) and the market’s interest in supporting first-time sponsor MPIUA.
Notwithstanding the USD2 billion of U.S. wind exposed bonds that preceded Shore Re Ltd. during the first half of 2010, Shore Re Ltd. was ultimately oversubscribed and was only sized to USD96 million (relative to a bracketed target at the time of announcement of USD100 million) to accommodate strong concurrent demand in the traditional reinsurance market place. The second and final transaction of the third quarter, EUR100 million Green Valley Limited Series 2 Notes, provides Groupama with protection against French windstorms through the end of 2011.
For the first three quarters of 2010, 12 catastrophe bonds were issued, for USD2.58 billion in risk capital . Year to date issuance is up 44 percent relative to the USD1.79 billion issued during the first three quarters of 2009.
Catastrophe Bond Redemptions
In the third quarter of 2010, State Farm’s USD1.06 billion Merna Reinsurance Ltd. matured, bringing year-to-date total maturities to USD4.10 billion. Another USD865 million is scheduled to mature in the fourth quarter of this year and further USD3.58 billion (40 percent of current risk capital outstanding) is scheduled to mature prior to June 30, 2011.
1. This includes Green Valley Ltd. a EUR100 million transaction converted to U.S. Dollars at an exchange rate of USD1.36:EUR1. For Euro denominated issues, amounts are converted to U.S. Dollars according to the prevailing exchange rate on the closing date of each transaction.
2. This figure includes broadly distributed 144A catastrophe bond transactions. State Farm’s USD250 million Merna Re III Ltd., which was privately placed, is not reflected is this total.
• Chi Hum, Managing Director
• Cory Anger, Managing Director
• Hong Guo, Managing Director
• Ryan Clarke, Vice President
• Brad Livingston, Analyst
ILW Market commentary provided by
• Barry Law, Managing Director (Guy Carpenter London)
• David Rothestein, Vice President (Guy Carpenter London)
* 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, Inc. 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.
Chi Hum, Cory Anger, Hong Guo, Ryan Clarke and Brad Livingston are registered representatives of MMC Securities Corp.