The first quarter of 2012 was the most active first quarter on record in the catastrophe bond market. Sponsors sought to lock in capital markets capacity for a diverse array of perils and structures in a somewhat uncertain traditional market environment. Capital providers proved up to the task, albeit at slightly increased pricing relative to market levels in late 2011.
During the quarter, eight transactions totaling USD1.34 billion of risk capital were placed. This total exceeds the previous first quarter high water mark of USD1.02 billion that was established in 2011.
First quarter issuance was significantly more diverse than a year before. Whereas in the first quarter of 2011 all transactions included exposure to U.S. hurricane risk, during the first quarter of 2012 both California and Japanese earthquake perils were marketed on standalone bases. Further differentiation was available through event structure, for example, occurrence versus aggregate trigger design, and risk/return profile. Total risk capital outstanding increased by 5.2 percent (equivalent to USD632.0 million). This is the first time the market has posted a net increase in risk capital outstanding during the first quarter since prior to the 2008 financial crisis.
The capital market continues to demonstrate significant and growing appetite for catastrophe risk. The year 2011 was challenging both in terms of insured catastrophe losses and broader financial market conditions. The cat bond market suffered a full principal loss on the Muteki Ltd. bonds as a result of the Tohoku earthquake and on the Mariah Re bonds as a result of the severe tornado season experienced in the United States. Broader financial markets were dragged down in the second half of the year by concerns over the U.S. and European Union economic outlook and the sovereign debt crisis.
Notwithstanding these challenges in 2011, existing catastrophe risk investors continue to report net new inflows. New investors are entering the space both on a direct basis and through investment in dedicated insurance linked securities (ILS) funds. Non-core investors who have been less active in the catastrophe bond market over the past several years have increased participation, attracted by compelling return opportunities relative to alternative markets.
The record level of issuance demonstrates that both protection sellers and buyers are seeing strong value in the ILS market. However, the cat bond market is attuned to the catastrophe losses sustained in 2011 and aware of forward capacity and pricing expectations in the traditional reinsurance market. During the quarter most transactions priced at or above the high end of their initial price guidance, indicating continued strong support from investors but with some upward pressure on pricing.
Risk capital issued in the first quarter exceeded the record total established in 2011 by more than USD300 million. Last year, four transactions resulted in USD1.02 billion of risk capital, while this year USD1.34 billion of risk capital was issued through eight transactions.
In January, repeat sponsors Swiss Re and Assurant came to market. The first of these was a USD63 million takedown from Swiss Re’s Successor Program. Assurant sponsored Ibis Re II, which secured USD130 million of three-year U.S. hurricane protection.
Three more transactions closed during February. The USD300 million KIBOU Ltd. marked the return of Zenkyoren to the catastrophe bond market. This transaction was particularly notable in that it served as a renewal of the USD300 million Muteki transaction, which suffered a total loss as a consequence of the Tohoku earthquake. The market proved eager to support Zenkyoren as a repeat sponsor. The market was also appreciative of enhancements Zenkyoren employed reflecting lessons learned from the post event loss calculation process in Muteki as well as other structural enhancements. The California Earthquake Authority (CEA) returned to the market to sponsor an additional USD150 million takedown from its Embarcadero Re shelf program. CEA was able to capitalize on the particularly strong support for its 2011 transaction and efficiently issue its existing shelf program. This transaction was well supported by the market as it provided diversification opportunity, offering investors access to the CEA’s earthquake risk on a standalone basis. February activity wrapped up with Munich Re’s Queen Street V Ltd. transaction. This transaction secured USD75 million of per occurrence U.S. hurricane and European windstorm protection. Of the USD1.34 billion of issuance during the first quarter of 2012, only USD98 million has exposure to European windstorm. None of this amount is exposed to European windstorm on a standalone basis.
There was USD625 million of issuance activity during March representing nearly half of the total for the quarter. Mystic Re III marked Liberty Mutual’s long awaited return to the catastrophe bond market. At USD275 million, this transaction was the largest U.S. hurricane exposed transaction of the first quarter. Liberty Mutual also decided to modify the trigger structure, moving to an indemnity trigger from industry index triggers in its previous transactions. Long standing sponsor Chubb also returned to the market in March with the USD150 million East Lane V transaction providing coverage for U.S. hurricane, severe thunderstorm and tornado perils on a per occurrence basis. The success of both Liberty Mutual’s and Chubb’s indemnity deals demonstrates a high degree of comfort by investors for indemnity trigger deals covering personal or commercial lines business. First quarter issuance activity concluded with the innovative USD200 million Combine Re transaction, which included exposure to a broad basket of U.S. natural perils on behalf of two sponsors, North Carolina Farm Bureau and Country Mutual.
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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.