Tuesday, May 18, 2010

Catastrophe Bonds Year-to-Date and Pipeline (AIG; HIG)

Following up on yesterday's "Insurance: Accuweather Calls for Wild Hurricane Season (AIG; ALL; BRK.B; CB; TRV)" and "Insurance: Here Come the Catastrophe Bond Offerings (AIG; BRK.B)", REACTIONS has a look at the year-to-date and the pipeline:

Catastrophe bond issuance in the first quarter of 2010 has been lower than previous years, while the issuance that took place has been outstripped by value of bonds maturing. But the market has picked up the pace in the second quarter.

2010 cat bond issuance up to May 10
Transaction Sponsor Size ($m) Perils / Triggers[1] Date
Lodestone Re Chartis (National Union Fire Insurance Company) Cl A: $175.0 U.S. HU, U.S. EQ PCS Index May 2010
Cl B: $250.0
Johnston Re Ltd NCJUA/NCIUA Cl A: $200.0 N. Atlantic HU Indemnity Apr 2010
Cl B: $105.0
Ibis Re Ltd 2010-1 Assurant Cl A: $90.0 U.S. HU PCS Index Apr 2010
Cl B: $60.0
Merna Re State Farm $350.00 U.S. EQ Indemnity Apr 2010
Successor X Ltd Swiss Re Cl II-CN3: $45.0 CN3: N. Atlantic HU, EU WD Modeled Loss, PERILS, Parametric Mar 2010
Cl II-CL3: $35.0 CL3: N. Atlantic HU, EU WD
Cl II-BY3: $40.0 BY3: N. Atlantic HU, EU WD, CA EQ, JP EQ
Foundation Re III The Hartford $180.00 US HU PCS Index Jan 2010
Source: Goldman Sachs
*Click here for full details of these deals

Catastrophe bond issuance in the first quarter of 2010 has been lower than previous years, while the issuance that took place has been outstripped by value of bonds maturing.

With an additional $4.08bn of risk capital scheduled to mature before the end of the year and total full-year bond issuance predicted to be between $3bn and $5bn, according to GC Securities, the capital markets division of Guy Carpenter, it appears the market has taken a step backwards.

In the first quarter, a total of $300m of risk capital was issued, down from the $575m issued in the first quarter of 2009 and the lowest level of issuance since the first quarter of 2006.

The relatively light level of cat bond issuance in the first quarter has done little to temper the market’s bullish outlook for the rest of the year. Richard Pennay, vice-president at Swiss Re Capital Markets, says that – despite the disparity between issuance and maturities – this is not a market in decline.

“The reason there is a high rate of maturity is largely driven by the very strong level of issuance that took place in 2007. Cat bonds generally only have a two year, three year or four year duration,” Pennay told Reactions.

This year’s issuance activity kicked off in January with the launch of Foundation Re III, a $180m catastrophe bond to provide The Hartford with protection against east and Gulf Coast US hurricanes.

The single-class note issuance from Foundation Re III uses a state-weighted per occurrence Property Claim Services index trigger structure based on insured losses reported for Florida and New York.

According to GC Securities, which was joint structurer and co-manager on the issuance, the deal was increased from the announced target of $100m and priced at the tight end of the initial price guidance range

The issuance provides multi-year protection for The Hartford against hurricane events from Texas to Maine. It is The Hartford’s sixth collateralised reinsurance coverage obtained through the insurance-linked securities (ILS) market since 2004.

Swiss Re sponsored a new series of the Successor transaction, Successor X, later in the quarter.

The $120m bond, which comprises three series of notes of $35m, $40m and $45m each, covers natural catastrophes such as North Atlantic hurricane, European windstorm, California earthquake and Japan earthquake.

Notably the deal was the first bond to use the Perils industry loss index as the trigger for its European windstorm exposure.

“Perils was a very positive addition,” says Pennay. “We are confident that Perils will add value to the market.”

( Click here to view data on all cat bond deals going back to 1994 )

Q2 outlook

First quarters tend to be slower than the second of fourth quarter in the ILS market, and are sometimes affected by spillover transactions that were attempted in the previous quarter but did not close.

“First quarter activity is hardly an indicator of what to expect for the balance of the year as the peak issuance periods within a calendar year for the catastrophe bond market are historically the second and fourth quarters,” said GC Securities in its first quarter catastrophe bond update....MUCH MORE