Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

40% of existing catastrophe bond capital to mature by end of June 2011


Guy Carpenter have published the third and fourth parts to their Q3 2010 catastrophe bond market review. The series make for interesting reading and we’ve linked to all four parts of the report below (we suggest you read them).

The third part of Guy Carpenters report discusses the fact that 40% of all outstanding catastrophe bond issuance is due to mature by the end of June 2011. That’s a lot of capital lost as investment opportunity if it was to mature without replacement and it’s possible we can expect the outstanding cat bond capital to reduce further from the current $11 billion of risk capital in the market. Guy Carpenter says market participants are eager to demonstrate growth and sustained issuance and are eager to see new issuance.

In the secondary cat bond market buyers generally outstrip sellers which has caused prices of existing bonds to appreciate. We can expect to see this trend continue until sufficient new issuance is available to calm investors.

Guy Carpenter say investors are focusing on stimulating issuance to give them somewhere to put available capital from maturing transactions. Cash inflows from maturing cat bonds are expected to accelerate over the next six months meaning that the first half of 2011 is going to be critical to the market as we really need to see significant issuance to keep investor interest high.

They say that investors seem willing to accept lower yields as cat bonds continue to be competitive with other asset types on a relative value basis. Investors are also willing to consider longer dated transactions and aggregate covers, says Guy Carpenter.

Improving stability in the capital markets as a whole means that investors are becoming more and more interested in finding non-correlated alternative investments again and this is where catastrophe bonds can shine.

The fourth part of Guy Carpenters report discusses the outlook for the fourth quarter and the first quarter of 2011. We’re already well into the fourth quarter and issuance has picked up after the traditional third quarter lull. They say that issuers see the benefit in issuing during these quarters as the second quarter (traditionally a time of high issuance) is overcrowded. Guy Carpenter say they expect building interest in non-peak perils such as European windstorm, Japanese quake and others.

Factors such as the perceived spread between reinsurance and catastrophe bonds being conducive to issuance of cat bonds, an investor base with significant inflows and still seeking a stable alternative investment should contribute to active issuance in the fourth quarter and even more active as we head into 2011.

The market seems poised to hit a busy period of issuance as cedents can take advantage of investor appetite and the cash inflows from maturing transactions. It would be extremely positive for the cat bond market if much of the maturing capital made its way back into the insurance-linked securities market through investment in new issuance.

Read the full report from Guy Carpenter in the four parts below:

Catastrophe Bond Update: Third Quarter 2010 – Activity (and Great Expectations) Persists, Part I: Issuance, Redemptions

Catastrophe Bond Update: Third Quarter 2010 – Activity (and Great Expectations) Persists, Part II: Risk Capital Outstanding, Industry Loss Warranties

Catastrophe Bond Update: Third Quarter 2010 – Activity (and Great Expectations) Persists, Part III: Market Dynamics

Catastrophe Bond Update: Third Quarter 2010 – Activity (and Great Expectations) Persists, Part IV: Outlook for Fourth Q 2010 and First Q 2011

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