July 18th, 2012

Catastrophe Bonds* at July 1, 2012

Posted at 1:00 AM ET

Catastrophe bonds continue to play an increasingly important role in the property catastrophe risk transfer market with particularly robust issuance levels. During the first six months of 2012, 15 transactions came to market, totaling USD3.4 billion of risk principal. In terms of risk principal, this is a 113 percent increase relative to the first half of 2011. Risk principal outstanding now stands at USD13.5 billion, within striking distance of the high water mark of USD14 billion established in 2007 after the post-Katrina-Rita-Wilma issuance surge.


Additionally, it is worth noting that while the 144A catastrophe bond market is the most visible component of direct capital markets capacity in the catastrophe risk market, it is not the largest.


Other conduits, particularly collateralized reinsurance and sidecar participations are also meaningful as additional sources of risk transfer capacity. The tempering influence of capital markets capacity in both reinsurance and retrocession markets was evident at the June 1, 2012, renewals. This occurred against the backdrop of the further integration of the RMS US wind model and the impact of significant losses sustained in 2011. Rate increases were generally less than market observers had expected heading into the renewal season.

Catastrophe bond spreads generally increased during the first half of the year, particularly for broadly exposed first event US hurricane exposures including Florida. However, as evidenced by the issuance totals, ample capacity was available at market clearing spreads. Leading into US windstorm season, however, and particularly after June 1, catastrophe bond spreads reversed course as investors sought to deploy cash inflows via the secondary market once the bulk of the first half 2012 primary issuance activity was completed. Owing to the significant exposure of the market to US hurricane risk (75 percent of current outstanding catastrophe bond limit is exposed to US hurricane) buying interest was most acute for non-US wind bonds or bonds with regional rather that broad US wind exposure.

Looking ahead to the balance of 2012, there is good reason to expect further growth and activity in the catastrophe bond/catastrophe risk market. The asset class has established an attractive risk versus return profile that is particularly appealing to institutional investors looking to generate additional yield while also not becoming overly concentrated in a particular strategy. There is an active pipeline for the second half of 2012 across a variety of non-US wind and non-US perils, which should serve to provide some ballast to the heavily US wind and US quake exposed market portfolio.

Protection buyers are benefiting from increasingly streamlined access options and, to a judicious and proper extent, flexibility from capacity providers with the respect to terms and conditions and trigger structures. Sophistication is continually increasing on the part of both buyers and sellers and this in turn is providing increased investment opportunities. Whether through the 144A catastrophe bond market or other conduits, these opportunities are increasing the amount of capital a motivated institutional investor base can deploy into the catastrophe risk asset class. Perhaps more importantly, as the sub-components of the “alternative capacity” pool have different attributes and drawbacks, they are relatively more or less appropriate for different types of capital and different types of underlying investment opportunities. Some of the alternative capacity sub-components include one year “hard market” sidecars, on-going “side by side” capacity vehicles, ILWs, collateralized reinsurance, retrocession vehicles, catastrophe bonds via specialized manager and catastrophe bonds on a direct basis. The proliferation of choice and rapid implementation is an important ongoing development as it allows the right kind of capital access to the right kind of catastrophe risk investment opportunities with decreasing response time needed to address market opportunities. On the whole, this should contribute to a more stable pricing and capacity environment that will be capable of persisting through significant insured loss events and/or insured loss years.

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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 U.S. 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 an offer to buy any security, financial instrument, reinsurance or insurance product. The securities mentioned herein have not been, and will not be, registered under the United States Securities Act of 1933, as amended (the “Securities Act”), and may not be offered or sold in the United States except pursuant to an exemption from the registration requirements of the Securities Act. **GC Analytics is a registered mark with the U.S. Patent and Trademark Office.

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