The catastrophe bond market posted its most active first quarter on record for new issuance in Q1 2011, according to a new report by GC Securities*. Four transactions came to market in the first quarter of 2011, securing USD1.02 billion of new and renewal risk transfer capacity. This represents a significant increase over the USD300 million issued during the same time period in 2010.
GC Securities Catastrophe Bond Market Update: First Quarter 2011 examines the catastrophe bond market’s strong first quarter performance, outlook and investor behavior as global catastrophe activity highlighted the market’s value.
Key findings in the report:
- Q1 2011 issuance topped the previous first quarter record of USD615 million posted in Q1 2008.
- Issuance was diverse in terms of risk profile and structure, although U.S. hurricane risk was the common peril in all four transactions.
- All transactions marketed during the first quarter priced within or inside of their initial spread guidance.
- USD1.24 billion of catastrophe bond risk capital matured in Q1 2011.
- Total risk capital outstanding declined by USD223 million during this time period, despite USD1.02 billion of new issuance.
- The industry loss warranty (ILW) market hardened significantly during the final weeks of the first quarter.
Bill Kennedy, CEO of Global Analytics and Advisory, Guy Carpenter & Company, stated, “Aside from strong issuance, the story of the first quarter for the cat bond market was the Tohoku earthquake, with cat bond valuations declining for the second half of March. However, it is important to note that in the aftermath of one of the largest earthquakes in recorded history, the cat bond market continued to trade in an orderly and disciplined fashion. Additionally, investors report that their own capital providers 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.”
Chi Hum, Global Head of Distribution, GC Securities*, added, “Overall, we see an improvement of the market’s ability to evaluate, understand and – where modeling and disclosure are sufficient – competitively price a more diverse range of perils, risk profiles, structures and triggers. This increased sophistication and measured expansion of investor appetite for risk should be a catalyst for healthy long-term growth. It is worth nothing that the long-term cumulative return profile for outstanding catastrophe bonds also compares favorably to alternative asset classes.”
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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 any offer to buy any security, financial instrument, reinsurance or insurance product.
Bill Kennedy and Chi Hum are registered representatives of MMC Securities Corp.