October 1st, 2013

Growth of Convergence Capital

Posted at 1:00 AM ET

The sector has seen robust catastrophe bond, structured ILW s and collateralized reinsurance activity throughout the last 18 months. In total, around USD10 billion of new capital has entered the global market in these various forms over this period. This segment of the reinsurance market now accounts for an estimated USD45 billion of capacity, approximately 14 percent of global property catastrophe limit purchased, and the penetration of this capacity is growing.

Guy Carpenter continually monitors the breakdown of convergence capacity in the insurance-linked securities (ILS) market. Outstanding catastrophe bonds account for more than a third of this capacity (at USD16 billion), though the greatest rate of growth is being seen in collateralized reinsurance (currently USD15 billion).

The capital supporting convergence capacity is increasingly stable institutional money that has made a long-term commitment to the reinsurance market.

Although some allocations to the sector may exit once investment returns in other comparable asset classes pick up, the commitment to the sector from such a broad range of institutional investors suggests this is a permanent alternative asset strategy allocation. This is a positive development for reinsurance buyers.

Institutional investors are gaining confidence in the asset class and, providing they do not experience material surprises significantly outside the range of modeled expected loss probabilities from the risks they are assuming, they will continue to support, or even increase, their allocations to the sector following a large catastrophe event.

Pension funds have been a major contributor to the growth in new capital. Their focus on relatively remote peak peril catastrophe risk has contributed to the boom in the catastrophe bond market during 2013, with issuance reaching USD4.8 billion in the first seven months (see Figure F-2). Risk capital outstanding also reached an all-time high of around USD16.6 billion during the same period. Given the strong demand that is anticipated for the remainder of the year, GC Securities expects 2013 catastrophe bond issuance to approach or exceed the record amount of USD7 billion recorded in 2007.

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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/NFA/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. (MMCSEL), which is authorized and regulated by the Financial Conduct Authority, main office 25 The North Colonnade, Canary Wharf, London E14 5HS. 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 any offer to buy any security, financial instrument, reinsurance or insurance product. **GC Analytics is a registered mark with the U.S. Patent and Trademark Office.

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