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CAT BONDS SEE RECORD QUARTER
Tuesday 10 May 2011
Author: Russell Group
 

While the first three months of the year have seen record Nat cat losses it has also seen the catastrophe bond market post its most active first quarter on record for new issuance.

Guy carpenter has issued its latest report on the cat bond market which has found four transactions came to market in the first quarter of 2011, securing $1.02 billion of new and renewal risk transfer capacity.

“This represents a significant increase over the $300 million issued during the same time period in 2010,” it said

Bill Kennedy, CEO of Global Analytics and Advisory, Guy Carpenter said:”Aside from strong issuance, the story of the first quarter for the cat bond market was the Tohoku earthquake, with cat bond valuations declining for the second half of March. However, it is important to note that in the aftermath of one of the largest earthquakes in recorded history, the cat bond market continued to trade in an orderly and disciplined fashion. Additionally, investors report that their own capital providers are responding well to the potential for principal loss associated with the event. Capital providers are prospectively focused on the implications for future issuance and investment opportunities, rather than looking to reduce their exposure to the asset class.”


The report, GC Securities Catastrophe Bond Market Update: examines the catastrophe bond market’s strong first quarter performance, outlook and investor behaviour as global catastrophe activity highlighted the market’s value.

The report found that Q1 2011 issuance topped the previous first quarter record of $615 million posted in Q1 2008. What was interesting was thre diversity of risk profile and structure, although U.S. hurricane risk was the common peril in all four of the transactions. All the transactions marketed during the first quarter priced within or inside of their initial spread guidance.

In total $1.24 billion of catastrophe bond risk capital matured in the quarter with total risk capital outstanding declining by $223 million during this time period, despite $1.02 billion of new issuance.

Chi Hum, Global Head of Distribution, GC Securities, added: ”Overall, we see an improvement of the market’s ability to evaluate, understand and – where modelling and disclosure are sufficient – competitively price a more diverse range of perils, risk profiles, structures and triggers. This increased sophistication and measured expansion of investor appetite for risk should be a catalyst for healthy long-term growth. It is worth nothing that the long-term cumulative return profile for outstanding catastrophe bonds also compares favourably to alternative asset classes.”