Cat Bond Market Set for Active Fourth Quarter, Reports Guy Carpenter

October 13, 2009

The catastrophe bond market is poised for an active fourth quarter in 2009, according to a new report.

The report by Guy Carpenter & Co., LLC, and GC Securities, a division of MMC Securities Corp. concludes that a number of trends are converging that could result in a total of between $3 billion and $4 billion of issuance in 2009. These include an increase in risk capital and the recent upsizing of catastrophe bonds in the third quarter of 2009.

According to the briefing, new risk capital issued in the third quarter of 2009 rose 28.8 percent compared with the third quarter of 2008. Two transactions, both closed in July 2009, resulted in $412 million of new risk capital issued, up from $320 million during the second quarter of 2008. For the first three quarters of 2009, a total of 11 catastrophe bonds have been issued, accounting for $1.79 billion in risk capital.
Year-to-date issuance activity has been down 33.5 percent versus the same period in 2008.

FOURTH QUARTER 2009 OUTLOOK
Improvement in global financial market conditions improving and advances in the insurance-linked securities (ILS) collateral solutions — coupled with a stronger demand for issuance and the increasing capacity of investors — have resulted in a shift in the ILS market relative to the beginning of 2009.

Investors are increasingly focusing on capital deployment and stimulating additional primary issuance, which is contributing to spread tightening, according to the report.

“Given the increase in risk capital and the performance of the two bonds issued in the third quarter — both in terms of pricing and size — a fourth quarter that would account for more than 40 percent of the year’s total issuance is not unattainable,” said David Priebe, chairman of Global Client Development, Guy Carpenter. “Redemptions resulting from cat bonds maturing and a fairly light Atlantic hurricane season should also increase demand for new issuance.”

The consensus estimate for 2009 total issuance remains from $3 billion to $4 billion, implying a fourth quarter issuance rate of $1.2 billion to $2.2 billion.

“The recent tightening of spreads has brought the ILS market back, after the unusually wide spread we saw in the first half of 2009 had a dampening effect on issuance activity, particularly from reinsurers,” said Chi Hum, global head of distribution, GC Securities. “Sponsors that had been hesitant to enter the market during the first half of 2009 because of pricing concerns may now renew their interest in catastrophe bonds, since the benefits of cat bond protection are available at more favorable price points.”

THIRD QUARTER ACTIVITY
Parkton Re Ltd., on which GC Securities acted as co-lead manager and joint bookrunner, was upsized and ultimately priced below its initial price guidance. The initial target placement of $125 million resulted in a $200 million transaction. The North Carolina Joint Underwriting Association and North Carolina Insurance Underwriting Association (NC JUA/IUA), a new entrant to the catastrophe bond market, sponsored Parkton Re. The bond covers North Carolina hurricane losses based on an indemnity trigger.

The Eurus II Ltd. transaction, which closed a day later, was also upsized to EUR150 million (from EUR75 million). The bond, which covers European windstorm risk in Germany, the United Kingdom, Netherlands, France, Belgium, Denmark and Ireland, replaced Eurus Ltd, a $150 million bond that matured on April 8, 2009.

CATASTROPHE BOND REDEMPTIONS
In addition to new bonds issued, $300 million of catastrophe bond risk capital matured in the third quarter of 2009, bringing the year-to-date total to $2.54 billion.

A total of $660 million is scheduled to mature during the fourth quarter of this year.

RISK CAPITAL OUTSTANDING
Following consecutive quarters of declines, total risk capital outstanding increased from the second quarter of 2009 to the third quarter, reaching $11.3 billion — up from $11.19 billion — a net increase of $112 million (1 percent).

The current level of risk capital outstanding is consistent with that of mid-year 2007.

ISSUANCE COMPOSITION
$200 million of the $412 million issued in the third quarter of 2009 had U.S. hurricane exposure, while the remainder had exposure to European windstorm.

Sources: Guy Carpenter & Co., LLC, and GC Securities

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