Swiss Re Insurance-Linked Fund Management

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Catastrophe bond market poised for significant issuance activity


A significant forward pipeline of catastrophe bond deals is readying itself, according to broker Guy Carpenter in their end of third quarter 2011 report on the state of the insurance-linked securities and cat bond market. Looking ahead to the rest of this year and into 2012, Guy Carpenter’s report says that the cat bond market appears to be poised for significant issuance.

The third quarter report, which you can access a copy of through the GCCapitalIdeas blog, contains a useful look back at the transactions which came to market during Q3, amounting to $512m of new risk capital transferred to investors through three 144a cat bond deals. It was the third most active Q3 on record according to Guy Carpenter and was supplemented by two private cat bonds placed under Section 4(2) which brought total issuance in Q3 to $684m.

The 144a cat bonds referred to in the report are Queen Street III Capital Ltd. from Munich Re, Embarcadero Re Ltd. from the California Earthquake Authority and Pylon II Capital Ltd. from EDF. The two privately placed cat bonds we assume to be Oak Leaf Re Ltd. and Kizuna Re Ltd. There was one more ILS transaction which Guy Carpenter have not covered in this report, the Vita Capital IV Ltd. Series V and IV mortality transaction from Swiss Re.

On cat bond maturities during Q3, the report discussed the $400m of risk capital which matured from Fhu-Jin and Topiary Capital. Guy Carpenter said that the maturity of these transactions helped to strengthen the bid for non-first event and non-U.S. wind transactions during Q3, presumably as investors sought to put the capital back to work in the market.

The report also looks at risk capital outstanding in the cat bond market (approx $10.7 billion at the end of Q3), industry loss warranty trading activity and the market dynamics over the third quarter. We may follow up with additional posts on some of these other topics from the report in the coming days.

The market prospects for the coming months are of most interest at this stage of the year. We wrote only last week about some predictions that suggested a steady flow of cat bonds for 2012. One of those insights was from Guy Carpenter themselves, so now we can put a little more colour to their prediction thanks to this more detailed report.

Guy Carpenter say that there are reasons to expect that the catastrophe bond market could be in for a banner year in 2012. They predict a diverse range of transactions will come to market, which should be well received by investors. They expect a diverse range of perils will come to market, including U.S. hurricane and earthquake both in broad geographic deals and regionally focused transactions as well as European windstorm and Japanese perils too. They also expect the diversity of cat bonds available to be helped by a range of risk profiles, trigger types and occurrence versus aggregate deals being used in new issuances. Interestingly they also suggest that new, previously unsecuritized as cat bond, types of risk could come to market, with this being assisted by the growing investor base who are increasingly becoming sophisticated and able to understand and accept new perils. Great news for the market!

They also mention Mariah Re, although the report was written before the full loss of Mariah Re 2010-1 was announced yesterday. Encouragingly they say that severe thunderstorm risk (which includes tornadoes) will still be of interest to both sponsors and investors despite the Mariah Re losses. This is likely true as sponsors will have seen the benefit of the payouts received by Mariah Re’s sponsors and investors are becoming much more understanding of the risks they take on and the nuances of cat bond structures and expected loss calculations.

Guy Carpenter say that this increased cat bond issuance will be welcomed by what they term a ‘primed and ready investor community’.

Historically, periods of peak cat bond issuance have been clustered around specific perils or groups of perils, for example the U.S. hurricane bonds issued after Katrina in 2007 or the combined U.S. hurricane/earthquake deals issued during the peak issuance year of 2010. This can cause a crowded deal environment which can lead to spreads being pushed higher as investors jostle for deals which are concentrated around specific risks, but ultimately many don’t get access to sufficient deal flow to meet their allocation and diversification needs.

So, the diverse issuance that Guy Carpenter predicts for the coming months should be just what investors are looking for, allowing them to achieve their cash deployment targets while keeping portfolios of cat bonds and ILS well diversified. This leads Guy Carpenter to suggest that 2012 could be a banner year and they note that the cat bond market should continue to serve as a complementary source of risk transfer to the traditional reinsurance market.

Bill Kennedy, CEO of Global Analytics and Advisory, Guy Carpenter & Company, LLC, said; “Our findings show that the cat bond market responded quickly to investor demand for investment opportunities, particularly for diversifying peril transactions. Demand for additional cat bond issuance remains robust.”

Chi Hum, Global Head of Distribution, GC Securities, added; “Continued volatility in the broader financial markets and comparatively attractive returns are driving net new inflows to the sector, helping to sustain the capital markets as a consistent, complementary source of capacity to the traditional reinsurance market.”

Download and read the full report from Guy Carpenter.

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