Posted on 14 Apr 2010
Catastrophe bond issuance conditions saw sustained improvement in the first quarter of 2010,
reflecting the increase in prominence of the insurance linked securities (ILS) asset class,
according to a briefing issued this week by Guy Carpenter & Company, LLC, and GC Securities,
a division of MMC Securities Corp. Despite the continued improvement in market conditions,
however, catastrophe bond issuance relative to the first quarter of 2009 was lighter than might
have been expected.
The briefing, Cat Bond Update: First Quarter 2010 (available at www.GCCapitalIdeas.com),
states that sponsors posted two catastrophe bond transactions during the first quarter of 2010,
resulting in USD300 million of risk capital issued. Responding to strong investor demand, both
transactions closed within initial price guidance and were upsized relative to their announced
placement targets. By comparison, the first quarter of 2009 saw three transactions totaling
USD575 million in risk capital issued.
FIRST QUARTER ISSUANCE
• Foundation Re III Ltd, a USD180 million transaction, was announced in January.
Sponsored by The Hartford, it provides PCS-index-based protection for North Atlantic
hurricanes causing insured losses along the U.S. gulf and eastern coasts. GC Securities
served as co-manager on the transaction, which was upsized from the initially announced
target of USD100 million.
• Swiss Re’s USD120 million Successor X Ltd transaction provides multi-peril protection
with different trigger types and different risk profiles, depending on tranche. The bond
priced at initial guidance and also was upsized from an initial target size of USD75 million.
It was the first catastrophe bond to utilize a PERILS-based trigger for its European
windstorm exposure. (Guy Carpenter is a founding shareholder of PERILS, which
aggregates and distributes industry-wide European natural catastrophe insurance data.)
RISK CAPITAL OUTSTANDING
• Total risk capital outstanding declined during the first quarter to USD 11.92 billion – a
decrease of USD588 million, as USD300 million of new issuance was outstripped by
USD888 million in maturities.
• USD4.08 billion of risk capital is scheduled to mature prior to the end of 2010.
• Of the USD300 million issued in the first quarter of 2010, USD180 million had
exposure exclusively to U.S. hurricane peril, while USD80 million had exposure to
both U.S. hurricane and European windstorm perils.
• An additional USD40 million had exposure to U.S. hurricane, European windstorm,
California earthquake and Japanese earthquake perils.
INDUSTRY LOSS WARRANTIES
• ILW pricing fell by 20 percent for U.S. hurricane-only and by 30 percent for U.S.
• Mindful of market conditions, protection sellers offered substantial reductions to secure
• All sellers, with the exception of IPC Re, returned to the ILW market in 2010.
2010 CATASTROPHE BOND OUTLOOK
• Cat bond spreads are roughly approximate with the traditional market and are acting as
a spur to further issuance.
• Though the rate of spread tightening may moderate, net cash inflows to sector – coupled
with more than USD4 billion of scheduled maturities – should continue to exert downward
pressure on spread levels.
• Losses resulting from events such as the earthquake in Chile and European storm Xynthia
have exerted a strain on reinsurers’ earnings but have not put cat bond layers in jeopardy.
• Taking all factors into consideration, the second quarter of 2010 should prove significantly
more active than the first, with the potential for 5 to 10 transactions, while total issuance
for the year is expected between USD3 billion and USD5 billion.
David Priebe, Chairman of Global Client Development, Guy Carpenter, said: “Though we have continued to see issuance conditions improve across the ILS market, there was somewhat less activity during the first quarter than many had anticipated. However, this should not be taken as an indicator of what to expect over the coming months, as the peak issuance periods for catastrophe bonds historically have been the second and fourth quarters. Our outlook for the remainder of the year remains bullish. ”
Chi Hum, Global Head of Distribution, GC Securities, stated that "the argument in favor of locking significant amounts of multi-year fixed price capacity has become even more compelling in the context of the earthquake and winter storm activity we witnessed during the first quarter of the year. With this in mind, our issuance outlook for the second quarter of 2010 is positive, with between 5 to 10 new transactions expected across a wide variety of perils. We also anticipate more activity later in the year.”