Five Insights into the Third-Quarter Catastrophe Bond Market

By Gary Kerney  |  October 2, 2012

Another quarter has come to a close, giving the catastrophe bond market fresh data and perspective. In the historically quiet third quarter, issuance was down compared with the same period in 2011. However, momentum for an anticipated busy fourth quarter began to build several weeks ago. No one knows whether issuance for the full year will surpass the $7 billion record set in 2007. But 2012 is already among the top years in the history of the catastrophe bond market — and that’s before the fourth quarter has even started.

Verisk’s Property Claim Services® (PCS®) has just released its Third-Quarter 2012 Catastrophe Bond Report: The Calm before the Fourth-Quarter Storm. In it, you’ll find details and commentary on market activity for the quarter and the year to date.

Let’s take a look at five highlights of the catastrophe bond market so far this year:

1. A slow quarter: Issuance fell from five transactions worth $800 million in the third quarter of 2011 to three worth $500 million this year. That doesn’t mean much, though, because the third quarter is usually the slowest of the year. After all, it comes in the middle of hurricane season, and approximately 70 percent of the global catastrophe bond market is exposed to U.S. hurricane.

2. Hurricane season: Catastrophe bonds covering hurricane rarely come to market in the third quarter. This year, though, one did: Queen Street VI Re covers both U.S. hurricane and European windstorm. For the U.S. hurricane exposure, the bond uses the PCS Catastrophe Loss Index as the trigger.

3. Bigger deals: Sponsors completed 19 transactions in the first nine months of 2012, up only two from the same period in 2011. However, issuers have raised $4.1 billion in fresh capital so far this year, up 41 percent from last year. Some of the increase in transaction size does come from Everglades Re, a $750 million deal completed in the second quarter.

4. Market share: Of the $3.4 billion in U.S. natural catastrophe−exposed transactions completed in the first nine months of 2012, $1.7 billion uses the PCS Catastrophe Loss Index. Of the remainder, $1.2 billion in exposure comes from Everglades Re, Pelican Re, and the Embarcadero Re series, which have unique risk profiles that tend to benefit from an indemnity trigger.

5. End of the year: To match the heights reached in 2007, sponsors would have to complete another $2.9 billion in catastrophe bond transactions this quarter — a level of single-quarter issuance attained only once before (in the second quarter of 2007). Even if that doesn’t happen, observers will remember 2012 as an active year: It’s already the fourth largest — by capital raised — in the history of the market.


Gary Kerney

Gary Kerney, one of the most prolific contributors to this blog, retired from Verisk in 2013. Mr. Kerney served as assistant vice president, Property Claim Services (PCS). Since joining PCS in 1981, he worked on catastrophe identification, loss estimating, and catastrophe response and mitigation.