Guy Carp: Cat Bond Mkt. Poised For Strong 4Q

NU Online News Service, Oct. 13, 3:13 p.m. EDT

Several converging trends could mean the catastrophe bond market is poised for one of the most active fourth quarters on record, according to a report by a reinsurance brokerage and investment banking unit.

The study was issued today by Guy Carpenter & Company, LLC, and GC Securities, a division of MMC Securities Corp.

It concludes that a number of trends are converging that could result in bonds being issued totaling between $3 billion and $4 billion this year. These include an increase in risk capital and the recent upsizing of catastrophe bonds in the third quarter of 2009.

The report, "Cat Bond Update: Third Quarter 2009," is available at www.GCCapitalIdeas.com.

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.

The report said 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, according to Guy Carpenter.

The report noted two major transactions in the third quarter.

o Parkton Re Ltd., on which GC Securities acted as co-lead manager and joint book-runner, 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.

o The Eurus II Ltd. transaction, which closed a day later, was also upsized to EU150 million ($222 million), from EU75 million ($111 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.

The report also mentioned that 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. It said a total of $660 million is scheduled to mature during the fourth quarter of this year.

The study found that 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).

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

Regarding the outlook for the fourth quarter, according to the analysis:

o 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.

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

o 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.

If this level is attained, the report said, it would represent 40-to-55 percent of the issuance in 2009 and would make the fourth quarter the most active of 2009. A fourth quarter accounting for greater than 40 percent of any year's total issuance has been reached only once (in 2004).

David Priebe, chairman of Global Client Development, Guy Carpenter, said in a statement, "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. Redemptions resulting from cat bonds maturing and a fairly light Atlantic hurricane season should also increase demand for new issuance."

Chi Hum, global head of distribution, GC Securities, said, "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."