After a record first quarter for the catastrophe bond market, which featured a diverse mix of old and new perils, new structures and new capital providers the capital market continues to demonstrate significant and growing appetite for catastrophe risk, says intermediary Guy Carpenter‘s GC Securities division in their end of Q1 2012 cat bond market report. The report says that the successes seen in Q1’s cat bond issuance illustrates the continued growth and maturation of the catastrophe risk asset class.
Guy Carpenters report, Catastrophe Bond Update: First Quarter 2012, takes a look at the health of the cat bond market after a busy Q1. The first quarter was the most active on record and saw sponsors trying to lock in capital markets capacity for a diverse range of perils and structures at a time when the traditional reinsurance market environment was a little uncertain. Providers of capital were up to the task, says Guy Carpenter, although pricing was slightly above levels seen in late 2011.
Q1 of 2012 saw significantly more diverse issuance than a year before, with a good mix of perils including standalone California and Japan earthquake cat bonds and diversity in structures through occurrence versus aggregate triggers and risk/return profile variance. This helps to keep the capital flowing into the space as sponsors purposefully bring deals they know will be well received by investors. The structurers, advisers and arrangers of cat bond deals deserve some praise for this as we know they advise sponsors on the best structures to use to ensure the cat bond is well received by the market depending on current conditions and recent deal flow. As a result of the strong issuance in Q1 the overall cat bond market (measured in risk capital outstanding) grew by 5.2% according to Guy Carpenters numbers.
Despite the challenging conditions in 2011 the capital market continues to demonstrate a significant and growing appetite for catastrophe risk. Existing catastrophe risk investors continue to report new inflows of capital and new investors are entering the ILS and cat bond space both directly and through investment managers funds. Guy Carpenter also say that some non-core investors who have been less active in the catastrophe bond market in recent years have begun to increase participation. This is excellent news and shows that currently cat bonds are an extremely attractive investment proposition due to their compelling returns and non-correlation to wider capital markets.
Guy Carpenters report takes a look at the cat bond deals that came to market in Q1 and also at the maturities that rolled off risk during the quarter. We won’t go into detail on those as you can find details of every cat bond in our Deal Directory.
On risk capital outstanding the report points out that the cat bond market has a good chance of continued growth throughout 2012 as maturities due to roll off risk only total $2.51 billion for the rest of the year. Q2 is due to see $1.44 billion of maturing cat bonds and we’ve already seen more issuance than that so we can certainly expect overall growth at the end of the current quarter. Relative pricing and capacity in the traditional reinsurance market and catastrophe activity are the factors which could affect or stimulate further the cat bond markets growth through the rest of 2012.
Q1 issuance showed the continued maturation of the cat bond market, as structural changes were made to increase transparency of transactions and fairness in the event of judgments. Guy Carpenter said that changes were made to “ensure that in a post-event loss scenario all stakeholders in the transaction are provided an ability to efficiently express their views in the instances in which judgment is required”. It’s assumed that these changes are due to disagreements over the Mariah Re triggering last year. Other efforts to improve transaction transparency included the inclusion of company loss files as supplements to transaction offering documentation.
Finally Guy Carpenter look ahead to the rest of 2012 and say that there is an opportunity for the market to achieve record levels of primary cat bond issuance in 2012. That would imply a total issuance of over $7 billion. Converting this potential record volume into reality is dependent on factors such as catastrophe activity, traditional reinsurance market conditions, market interest from protection buyers and sellers and also how market conditions translate into the price versus value perception of cat bonds. GC Securities, Guy Carpenters capital markets arm, have a baseline view of a volume of $5.5 billion but with significant potential for more issuance if market conditions are right. It’s good to hear bullish comments like that from high-profile market participants.
You can access the full report via the GCCapitalIdeas blog.