Catastrophe bond capacity is maturing, and not much of it is coming back. In the first quarter, $1.8 billion in cat bond risk capital matured, and only $508 million returned in the form of new issuances, according to Thomson Reuters. This quarter, $2.77 billion is maturing, and the absence of first-time issuers makes it unlikely that the market will replace it all. More than a billion of it was from State Farm's Merna Re transaction. The successor to it has already been issued, cleverly named Merna Re II, at only a fraction of the previous bond.
So far, only three cat bonds have closed this year, with The Hartford (HIG) and Swiss Re (SWCEY) joining State Farm. Of course, we're only two weeks into Q2 and Q1 is normally quiet. Nonetheless, analysts expect action of around $5 billion for the year, which would make 2010 the second most active cat bond issuance year in the history of the market, after 2007, in which close to $7 billion in capital came to market. Meanwhile, there are plenty of bonds maturing in the next few months, including those from, USAA, Allstate (ALL) and Swiss Re.
According to Michael Halsband, a vice president at Goldman Sachs Group, Inc. (GS), $3 billion and $3.5 billion in cat bond capital was expected to mature in the first half of this year. According to an interview in Thomson Reuters, "There are likely to be around seven transactions coming to market by July. At present, the immediate pipeline seems once again weighted toward U.S peak exposures, some covering multiple perils, and at least one bond concentrated in hurricane only."
Halsband adds, "In a soft market environment such as the one in which we presently find ourselves, it is more difficult to persuade potential issuers to pay the incremental cost to lock in multi-year capacity, diversification and security instead of buying such additional protection from traditional reinsurance."