During the first quarter of 2013 two natural peril-exposed catastrophe bond transactions closed, for a total of USD520 million of issuance (1). This seemingly low level of primary issuance activity is deceiving, however, as the action in the capital markets and the influence of “non-traditional” capacity (a term that is rapidly approaching obsolescence) has never been higher. Conservative institutional asset managers, the custodians of trillions of dollars of investable assets, have largely accepted catastrophe risk as a component of mainstream investment strategy. And, while it is the case that institutional capital’s pursuit of catastrophe risk has been aided by a low interest rate environment, short-term yield chasing is not the primary driver of the inflows. Rather, this is stable capital that has spent years evaluating the catastrophe risk asset class, looking for both steady returns and, in the aftermath of covered events, orderly payment of losses. It has been waiting to see organized secondary trading activity during live catastrophe events such as Hurricane Irene (in 2011) and, most recently, Superstorm Sandy (in 2012). On all fronts, the catastrophe risk market has demonstrated it is ready to transition from adolescence to young adulthood. The impact has been dramatic; pricing has decreased more than 50 percent year over year, particularly for peak U.S. risks such as Florida, which carry significant profit margin for the traditional reinsurance market.
Issuance Activity Highlights
Caelus Re 2013-1, sponsored by Nationwide, was the first transaction to come to market. This transaction is exposed to U.S. Wind and U.S. earthquake perils on a first event basis. Market demand was significant, allowing an upsize from the initial announced size of USD200 million to a maximum placement amount of USD270 million. Final pricing settled at a risk spread of 5.25 percent per annum, nearly 25 percent below the lower bound of the initial spread guidance of 6.75 percent to 7.75 percent. The second transaction that closed during the first quarter was Everglades 2013-1. This transaction was the second catastrophe bond offering sponsored by Florida Citizens, which brought its first catastrophe transaction in April of 2012. Everglades 2013-1, which secured USD250 million of protection against Florida hurricanes for a three year risk period, settled at a final risk spread of 10.0 percent, roughly 40 percent below where Everglades 2012-1 priced (after adjusting for the differing risk profiles between the two transactions).
Details on each transaction completed during 2013 year-to-date (YTD) can be found at the end of this briefing.
Maturities (2013 YTD and Projected)
In the first quarter of 2013, USD510 million of issuance was offset by USD352.5 million of maturities, driving an increase is risk capital outstanding of USD167.5 million. An additional USD2.99 billion of risk capital is scheduled to mature prior to December 31, 2013, of which USD2.63 billion is scheduled to mature prior to June 30, 2013. The composition of these maturities is shown in Table 1.
1. This total reflects 144A natural peril exposed issuance only. Aetna also sponsored USD150 million Vitality Re bond, which is exposed to changes in medical benefits paid to Aetna policyholders.
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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.