May 16th, 2011

GC Securities* Catastrophe Bond Market Update: First Quarter 2011

Posted at 1:00 AM ET

The first quarter of 2011 was the most active first quarter in the history of the catastrophe bond market in terms of new issuance. All told, four transactions came to market securing USD1.02 billion of new and renewal risk transfer capacity. This is a significant increase over the USD300 million issued during the first quarter of 2010 and previous first quarter high-water mark of USD615 million posted during the first quarter of 2008. Issuance was diverse in terms of risk profile and structure, although U.S. hurricane risk was a common theme in all four transactions.  All transactions marketed during the first quarter of 2011 priced within or inside of their initial spread guidance.

Figure 1


Aside from strong issuance, the story of the first quarter in the catastrophe bond market and the world as a whole was the tragic and devastating “Great Tohoku” earthquake that occurred off the northeast coast of Japan on Friday, March 11. This earthquake registered a 9.0 magnitude according to the U.S. Geological Survey making it the largest and fourth largest earthquake in recorded history of Japan an the world, respectively. On a modeled basis (as of this writing) this event is expected to cause between USD15 billion and USD30 billion of insured loss and as much as USD300 billion of economic loss. The Tohoku earthquake had an immediate and noticeable impact not only on catastrophe bonds with exposure to Japanese earthquake risk, but also on the catastrophe bond market generally, particularly in the context of other first quarter catastrophe events including significant flooding and Cyclone Yasi in Australia, the (second) Christchurch earthquake in New Zealand and the recent RMS U.S. wind model update.

Valuations of cat bonds (both Japan earthquake exposed and otherwise) declined for the second half of March after the Tohoku earthquake, reflecting expected principal losses to Japan earthquake exposed cat bonds, mark to market losses (primarily with respect to certain second and/or subsequent event bonds expecting to shift to first event bonds) and also perception of potential for a general increase in the price of catastrophe risk protection. However, it is important to note that in the aftermath of one of the largest earthquakes in recorded history the catastrophe bond market continued to trade in an orderly and disciplined fashion. Additionally, investors report that their own capital providers, for example, institutions that have made or are planning to make allocations to the insurance linked securities (ILS) asset class, are responding well to the potential for principal loss associated with the event. Capital providers are prospectively focused on the implications for future issuance and investment opportunities rather than looking to reduce their exposure to the asset class.

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* 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.

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