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Willis ILS Report: Non-Hurricane Cat Bond Issuance the Theme for Q3

Posted on 08 Nov 2011

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The latest Insurance-Linked Securities (ILS) Market Update from Willis Capital Markets & Advisory, part of Willis Group Holdings, found that none of the four catastrophe bond issuances in the third quarter of 2011 had exposure to U.S. hurricane risk, and together represented a total of $676 million of new risk capital.

The quarterly report titled, “New Non-Hurricane Issues, as 2011 Hurricane Threat Recedes”, said that despite this diversification, the market remains heavily weighted towards U.S. wind risk, with 67 percent of capital covering such events, down from approximately 71 percent last quarter. With $1.24 billion of Euro wind exposure scheduled to mature in the first six months of 2012, Willis says that this trend of non-U.S. wind issuance will likely continue.

WCMA was upbeat about the potential for robust cat bond issuance in the fourth quarter of 2011 and the first quarter of 2012 as the reinsurance market recovers from catastrophe losses and regains confidence after the uncertainty created by catastrophe model changes in the first half of this year.

The market update pointed to other catalysts for increased issuance going forward, including pent up demand from prior quarters; tightening spreads, especially for perils other than U.S. hurricane; and substantial maturities being due in the first half of next year.
Bill Dubinsky, Head of ILS at WCMA, said, “As is typical during the lead up to the peak of U.S. hurricane season, we saw sponsors focus on deals with other perils. Looking ahead, most of the signs point to a busy year end and first quarter for cat bond issuance and related investor activity.”

Uncertainty around two pending regulatory initiatives in the US, which may come to fruition later next year, could potentially see deals brought forward to the remainder of this year and the first quarter of 2012, said Willis. The two initiatives, highlighted in the report, that could potentially affect cat bond structures include the "no conflicts" regulation under the Dodd Frank Wall Street Reform and Consumer Protection Act, and proposed changes under SEC Regulation AB, which governs the registered issuance of securitizations.

Other findings in the WCMA report include:

*Cat bond issuance in the third quarter of 2011 was up $196 million over the same period last year, with four issuances representing a total of $676 million. In contrast, $480 million was issued in three deals in the third quarter of 2010.

*Year-to-date, the market has seen a total of $2.28 billion in new issuance in 2011, compared with a total of $2.98 billion during the first three quarters of 2010. This decrease in issuance can be largely attributed to catastrophe losses and model changes.

* A French energy company sponsored the first corporate cat bond since 2007 this quarter. Willis says that the success of this deal coupled with recent loss activity and the increasing use of the private deal format could make these transactions more common in the future.