2011 was a year of significant activity for catastrophe risk investors and sponsors. As of December 9, 2011, the total 144A property catastrophe bond issuance for the year stood at USD3.86 billion, which is 84 percent of the USD4.6 billion issued during the 2010 calendar year. By the end of 2011, total issuance is expected to exceed USD4.0 billion, and a deep pipeline of transactions exists for the first half of 2012 and beyond.
2011 issuance was concentrated in the first and fourth quarters of the year. The USD1.02 billion of first quarter issuance was easily the most active first quarter on record. Second quarter activity was substantially lower than historical norms. Historically, the second quarter is one of the most active primary issuance periods in the year. This can create a crowded marketing environment generating upward pressure on clearing spreads and downward pressure on total issuance – a state of affairs in which neither sponsors nor capital providers benefit. As a countermeasure leading in to 2011, several sponsors who have integrated capital markets capacity into their overall risk transfer strategies elected to accelerate planned transactions. These transactions might otherwise have occurred from the second quarter of 2010 through the first quarter of 2011. The third quarter of 2011 was the third most active third quarter on record principally due to strong investor demand for non-US wind exposed transactions. Consistent issuance activity continued throughout the fourth quarter. This occurred as demand for US wind exposed transactions resumed in the aftermath of a less severe US wind season than forecast (in terms of insured losses) and a forward view of more than USD2.1 billion of scheduled maturities in the first half of 2012. Fourth quarter activity was dominated by annual aggregate transactions as sponsors focused on multiple event “sideways” exposures in the context of 2011 catastrophe activity. The market was supportive of these transactions, as they generally provide an opportunity for increased yield relative to occurrence transactions and present some amount of diversification to an otherwise single, remote event occurrence-focused portfolio.
Risk Capital Outstanding
As of December 9, 2011 total risk capital stood at USD11.89 billion. This represents a 2.4 percent (USD296 million) decrease relative to the USD12.16 billion outstanding at year-end 2010 and accounts for the USD500 million of principal losses expected to be sustained during 2011 due to covered catastrophe events. By year-end total risk capital outstanding is expected to reach USD12.01 billion, which would represent a year-on-year decrease of only 1.4 percent. Total risk capital outstanding increased by more than USD1.25 billion during the second half of 2011. This trajectory is particularly impressive given the proliferation of alternative products to the 144A market that enable sponsors to access capital markets capacity. These valuable and important alternatives notwithstanding, the growth in risk capital outstanding during the second half of the year illustrates the central role the 144A market should play in the disciplined development and expansion of the catastrophe risk asset class.
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