May 17th, 2011

GC Securities* Catastrophe Bond Market Update: First Quarter 2011; Issuance, Redemptions and Capital Outstanding

Posted at 1:00 AM ET

Issuance Activity

First quarter issuance activity kicked off in February with a takedown from Swiss Re’s Successor shelf program.

  • The Successor X Class IV Notes provide USD305 million of protection for U.S. hurricane and California earthquake events to Swiss Re.
  • The Hartford, a veteran capital markets sponsor, also returned to the cat bond market in February with a second takedown from its Foundation Re III Ltd. shelf program. The Foundation Re III Ltd. 2011-1 notes provide The Hartford with USD135 million of four-year protection from U.S. hurricanes in a covered area spanning from Texas to Maine.

The final two transactions of the first quarter 2011 closed in March.

  • East Lane IV Ltd., sponsored by Chubb, was most notable for its significant size. At USD475 million it was by far the largest transaction of the first quarter and in fact among the largest in the history of the catastrophe bond market. This transaction, which closed on March 7 and priced inside of initial spread guidance provides Chubb with USD225 million of three year protection from the Class A Notes and USD250 million of four year protection from the Class B Notes against hurricanes, severe thunderstorms and earthquakes occurring in the Northeast United States.
  • The final transaction of the first quarter, USD100 million Queen Street II Capital Limited served as a modified renewal of Munich Re’s initial Queen Street Capital transaction which matured on March 21, 2011. Notably, Queen Street II Capital Limited, which provides Munich Re with three year protection for U.S. hurricanes and European windstorms, was able to successfully close within the initial spread guidance and at the announced transaction size, notwithstanding the occurrence of the Tohoku earthquake (virtually all investors continued to participate at their pre-Tohoku earthquake pricing and capacity levels) and the release of the RMS U.S. model change, both of which occurred during the Queen Street II Capital marketing period.

Table 1


Catastrophe Bond Redemptions

In the first quarter of 2011, USD1.24 billion of catastrophe bond risk capital matured. USD553 million of this amount was exposed exclusively to European windstorm. Of the remaining USD685 million, two separate transactions of USD150 million each were exposed to California earthquake and U.S. hurricane respectively. The remaining USD385 million, comprised of two transactions, was exposed to multiple worldwide perils including U.S. hurricane and earthquake, European windstorm and Japan earthquake. Notably, the one maturing transaction with exposure to Japan earthquake, USD235 million Atlas Reinsurance IV Ltd., matured in January, well before the Tohoku earthquake struck in mid-March.

Risk Capital Outstanding

Total risk capital outstanding declined by USD223 million (1.8 percent relative to year-end 2010) during the first quarter despite USD1.02 billion of new issuance. Over the past two quarters, approximately USD3.03 billion of risk capital has been issued. This is the second highest sequential two quarter issuance total in the history of the catastrophe bond market.

Figure 2


Issuance Composition

All of the USD1.02 billion issued in the first quarter of 2011 had exposure to the peril of U.S. hurricane. USD135 million was exposed to U.S. hurricane exclusively, USD100 million was exposed to U.S. hurricane and European wind on a joint basis and USD475 million was exposed to Northeast U.S. hurricane, earthquake, thunderstorm and windstorm perils.

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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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