H2 issuance of up to $3.7bn possible, says Guy Carpenter

Eight catastrophe bonds worth a total of $2.05bn were issued in the second quarter of 2010, making it the second most active second quarter on record, according to reinsurance broker Guy Carpenter’s latest cat bond market update.

The second and fourth quarters of a year are typically the most active for cat bond issuance.

Guy Carpenter also found continued strong investor demand for cat bonds as well as favourable conditions for sponsors.

However, the broker said appetite for US wind risk reached a limit, as an issuance surge caused some investors to run up against their exposure limitations. It added that some investors sought to trim US wind exposures by selling their positions in the secondary market, but noted that others, seeing an opportunity to buy exposure at a discount, picked up modest amount of additional US wind-exposed bonds at sub-par prices.

Some $350m of the new Q2 issuance had exposure solely to New Madrid earthquake in the US, while $1.7bn had exposure to US hurricane. Only one new sponsor entered the market, which was Chartis with its Lodestone Re transaction.

Despite the new issuance, outstanding catastrophe bond risk capital fell by $105m to $11.82bn, as the $2.05bn of new bonds were outstripped by $2.16bn of maturities. An additional USD1.92 billion of risk capital is scheduled to mature before the end of 2010.

Guy Carpenter expects light issuance in the third quarter, in keeping with historical trends, as investors and sponsors review their positions and market conditions. However, the broker added that if cat bonds can remain competitive with other risk transfer alternatives, second half issuance of between $1.7bn and $3.7bn should be achievable.

It added that despite the drop in appetite for US wind risk, demand for non-US wind-exposed transactions remains robust, and active discussions continue concerning US earthquake, European windstorm, Japanese earthquake and windstorm and other perils.