Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Issuance and investor demand for cat bonds surges in second quarter 2010


Guy Carpenter have issued their second quarter of 2010 catastrophe bond market report. They cite the eight cat bond transactions and $2.05b of risk capital issued as the second most active quarter on record. Seven of these transactions involved U.S. hurricane risks and $1.7b of the risk capital issued was for U.S. wind which to us demonstrates the frustration of some investors who find it hard to diversify their portfolios sufficiently.

Despite all this new issuance, actual outstanding capital in the catastrophe bond market has declined by 0.8% during the last quarter. There is a further $1.06b of capital in Merna Re Ltd. which matured in July. This means there has been significant capital which has not actually been reinvested in the market. We believe this has been partially due to the lack of diversification options and investors being nervous to put their money into U.S. hurricane exposed transactions with such an active storm season predicted.

Guy Carpenter expect third quarter issuance to be light (it historically always is) as sponsors and investors review their positions and watch the unfolding hurricane season. They see issuance for the second half of 2010 as likely to be somewhere between $1.7b and $3.7b.

Bill Kennedy, Global CEO of Analytics, Capital Markets, Specialty Practices and Advisory, Guy Carpenter & Company, LLC said “The number of catastrophe bond investors continues to increase, as does the size of assets under management. We saw this heightened interest, coupled with very favorable issuance conditions, bear fruit in the second quarter of 2010, as issuance activity remained robust week over week. Whether this momentum will continue through the fourth quarter and into 2011 depends on a number of factors, including the Atlantic hurricane season and broader market conditions, but it is fair to say that the catastrophe bond market continues to advance, innovate and welcome new participants – all healthy signs.”

Chi Hum, Global Head of Distribution said “From the fourth quarter of 2009 to the beginning of the second quarter of 2010, transactions generally reached issuance targets or upsizing and pricing at or below the midpoint of their initial spread guidance range. This trend moderated and in some cases reversed itself during the second quarter of 2010 as investors were resistant to accepting additional U.S. wind risk. Because nearly all of the new issuance available in the second quarter included U.S. wind exposure, transactions coming to market in late April or May faced more challenging market conditions, which in some cases resulted in concessions being made by protection buyers with respect to deal size and spread levels.”

So overall signs for the market remain positive and investors remain extremely interested in catastrophe bonds and insurance-linked securities as an asset class. The hurricane season is going to be closely watched and how that plays out could have a big impact on the market through the rest of the year. Diversification still remains one issue that the market will have to overcome if it is to grow significantly, investment capital available will always be limited to some extent while the bulk of deals are exposed to U.S. hurricane risks.

The full report from Guy Carpenter is available on their blog.

Details of all of the catastrophe bond transactions issued during the last quarter are available in our catastrophe bond Deal Directory.

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