Catastrophe bond market grows further in Q2 2012, nears all time high

During the first six months of 2012 catastrophe bonds have continued to play an important, and growing, role in the property catastrophe risk transfer market, says a latest quarterly reinsurance market report published today by broker Guy Carpenter. The year to date has seen particularly robust issuance levels of new cat bonds and so far this year Guy Carpenter record 15 transactions totalling $3.4 billion of risk capital, a 113% increase on the issuance seen in the first half of 2011.

The Guy Carpenter figure is lower than the one we report from the Artemis Deal Directory due to differences in the types of transaction that we include. Our Deal Directory contains 17 transactions classified as insurance-linked securities or catastrophe bonds, totalling approximately $3.6 billion in risk capital. Differences aside, the important headline figures to note are the ones around volume of issuance and growth, a 113% increase on 2011 is a very healthy increase even with the issues of 2011 taken into account.

Thanks to the robust issuance Guy Carpenter now record the total amount of catastrophe bond risk capital outstanding at $13.5 billion, just shy of the $14 billion they recorded at the markets peak in 2007. Again, we report a range of numbers on risk capital outstanding from different sources, but what is important is the growth achieved within the market as this allows more capital to be put to work and more investors to access the sector. The chart below from Guy Carpenter shows that since the end of 2011 the amount of cat bond risk capital outstanding has grown by almost $1.4 billion which is very healthy (and over $700m in the last quarter).

Catastrophe bond risk capital issued and outstanding 1997 - 2012 YTD - Source: GC Securities

It has to be expected that we’ll see further growth as the rest of the year progresses. There are only around $1.1 billion of additional cat bond maturities expected through the rest of 2012 meaning that issuance should easily outstrip that figure and the market should easily achieve its all time high point by the end of the year. Again, this will please ILS fund managers and investors who are eager to deploy additional capital into the sector.

Guy Carpenter see’s an active pipeline of cat bond and ILS issuance ahead in the second half of 2012. They expect a variety of non-U.S. wind and non-U.S. peril deals will come to market offering diversification opportunities and hopefully reducing the cat bond markets exposure to U.S. hurricane risks somewhat. Currently the cat bond market is around 75% composed of U.S. hurricane risks and is also becoming quite weighted towards U.S. earthquake. Diversification is key to enable ILS fund managers to achieve their investment strategies of well-balanced portfolios of risk.

You can read more from Guy Carpenter here.