Cat Bonds Weighted Toward U.S. Hurricane Risks

NU Online News Service, July 13, 1:31 p.m. EDT

Catastrophe bonds are heavily weighted toward U.S. hurricane risk and some investors are pulling back on their allocation to the exposure because of this, according to a producer’s report.

Reinsurance broker Guy Carpenter says the percentage of the catastrophe bond market with exposure to U.S. hurricanes has grown from 38 percent in 2003 to 71 percent, today.

The broker says the second quarter of this year saw four new catastrophe bonds come to market, totaling $592 million of new issuance.

Through 2011, there is a total of $10.6 billion in catastrophe bonds outstanding, down from $12.2 billion at the end of 2010. Guy Carpenter says that during the quarter $1.6 billion of risk capital was returned to investors through maturing cat bonds.

Investors suffered a full loss on one of the bonds as a result of the Tohoku earthquake: the $300 million Muteki issuance.

Guy Carpenter went on to say that while other bonds were affected by the impact of the Tohoku earthquake, they did not have to make a principal payment.

The second quarter also saw a new issuer come to market, Argo Re. Argo’s bond, Loma Re, provides Argo Re with 18-month protection against certain U.S. hurricane, U.S. earthquake, Europe windstorm and Japan earthquake on a per-occurrence, second-event basis.

The first quarter of 2011 was the most active first quarter in the history of the catastrophe bond market in terms of new issuance. All told, four transactions came to market, securing $1.02 billion of new and renewal risk transfer capacity. The broker says this is a significant increase over the $300 million issued during the first quarter of 2010 and previous first quarter high-water mark of $615 million posted during the first quarter of 2008.

Issuance was diverse in terms of risk profile and structure, though U.S. hurricane risk was a common theme in all four transactions. All transactions marketed during the first quarter of 2011 priced within or inside of their initial spread guidance.

Guy Carpenter is a subsidiary of Marsh & McLennan Cos., which also owns the insurance broker Marsh.