Help

BI’s Article search uses Boolean search capabilities. If you are not familiar with these principles, here are some quick tips.

To search specifically for more than one word, put the search term in quotation marks. For example, “workers compensation”. This will limit your search to that combination of words.

To search for a combination of terms, use quotations and the & symbol. For example, “hurricane” & “loss”.

Login Register Subscribe

Favorable rates spur catastrophe bond issues: Analysis

Reprints

Catastrophe bond activity likely will gain momentum in the second quarter of 2010 amid ongoing favorable market conditions for sponsors, according to an analysis released Tuesday.

Insurers could complete an estimated five to 15 second-quarter transactions, according to the analysis by New York-based Guy Carpenter & Co. L.L.C. and GC Securities Ltd., both units of Marsh & McLennan Cos. Inc.

While the second quarter typically is active as the market approaches the June 1 start of the Atlantic hurricane season, the outlook remains “bullish” with expected total issuance for 2010 reaching $3 billion to $5 billion, the report said.

Two cat bonds totaling $300 million closed in the first quarter of 2010, both featuring strong investor demand that resulted in significant upsizing relative to the original targets. By comparison, three transactions totaling $575 million closed during the first quarter of 2009, according to the report, “Catastrophe Bond Update: First Quarter 2010—Heavy Smoke, Some Fire…Encouraging Conditions Persist.”

Current cat bond spreads, which determine the pricing for sponsors, are roughly in line with the traditional market and likely will spur further issuance, Guy Carpenter said.

A significant drop in cat bond pricing during the fourth quarter of 2009 helped boost issuance last year. Pricing peaked during the first half of the year when the market was still hampered by the financial crisis.

And although declines in pricing levels may moderate, net cash flows into the sector plus more than $4 billion of bonds that are scheduled to mature this year should continue to exert downward pressure on pricing, the report said.

In addition, losses resulting from recent events including the earthquake in Chile and Windstorm Xynthia in Europe have strained reinsurers' earnings but have not put cat bond layers in jeopardy, the report concludes.

Deals completed in the first quarter include Swiss Reinsurance Co.'s $120 million Successor X Ltd., which provides three-year catastrophe coverage against losses from North Atlantic hurricanes, European windstorms and earthquakes in California and Japan. In addition, Hartford Financial Services Group Inc.'s $180 million bond, Foundation Re III Ltd., provides protection against U.S hurricanes.

In other cat bond activity so far this year, State Farm Fire & Casualty Co., a subsidiary of State Farm Mutual Automobile Insurance Co., recently placed a $350 million cat bond to cover part of its U.S. earthquake exposure excluding California, according to New York-based Standard & Poor's Corp. The bond, not counted in the first-quarter total, is expected to close this month.

The report can be accessed at www.gccapitalideas.com.