July 13th, 2011

Focus on Hurricane Season at July 1, 2011 Reinsurance Renewal: Catastrophe Bonds

Posted at 1:00 AM ET

The second quarter of 2011 saw four catastrophe bonds* came to market, totaling USD592 million of new bond issuance. The cat bond market continued to become heavily weighted to US hurricane exposure, causing some investors to pull back on their allocation to US hurricane exposure. Other perils did not grow at the same rate. The percentage of the cat bond market with exposure to US hurricane has grown from 38 percent in 2003 to 71 percent today.

During the quarter, USD1,617 million of risk capital was returned to investors through maturing cat bonds. Investors also suffered a full loss on one of the bonds as a result of the Tohoku earthquake: the USD300 million Muteki issuance. While other bonds have been affected by the impact of the Tohoku earthquake, caused, for example, by the shifting from second event to first event, none other besides Muteki have had to make a principal payment. The secondary market traded down during March, reflecting expected principal losses from the Tohoku earthquake, mark to market losses as second event bonds shifted to first event bonds and potential for reinsurance rate increases. 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, and the investors are assessing whether this is the market opportunity to increase their allocation to catastrophe risk.

The second quarter also saw a new issuer come to market, Argo Re. Argo’s bond, Loma Re, provides Argo Re with 18 month protection against certain US hurricane, US earthquake, Europe windstorm and Japan earthquake on a per occurrence second event basis.

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, though US 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.

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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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