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Guy Carpenter First-Quarter Report: Cat Bond Market Weathering Global Financial Downturn

Source: Guy Carpenter


Posted on 13 Apr 2009

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The catastrophe bond market is weathering the effects of the global financial downturn while maintaining a strong issuance pipeline for the remainder of 2009, according to a briefing published by Guy Carpenter & Company, LLC, a leading global risk and reinsurance specialist, and GC Securities, a division of MMC Securities Corp.

“After a fallow period for cat bonds at the end of 2008, we’ve seen issuance bounce back up to levels that are consistent with the first quarter of 2008," said David Priebe, Chairman of Global Client Development at Guy Carpenter. "The outlook for the remainder of 2009 is positive, with a strong pipeline of deals in the works. Sponsors are increasingly integrating catastrophe bonds into their risk management plans and leveraging these instruments as strategic tools for moving risk out of carrier portfolios.”

The briefing, entitled "Cat Bond Update: First Quarter 2009", indicates that cat bonds remain important tools for risk and capital managers, with three bonds coming to market in the first quarter of 2009, totaling $575 million in fresh capital.

First-Quarter 2009 Activity

• The number of catastrophe bond transactions in the first quarter of 2009 was equal to those in the first quarter of 2008, with the amount of risk capital virtually unchanged year over year (down a mere 6.5 percent from $615 million).

• All three transactions in the first quarter of 2009 were for U.S. perils only, with $150 million (26 percent) exposed specifically to Florida wind.

• Two transactions were redeemed early during the first quarter of 2009, removing $175 million in limits from the catastrophe bond market and resulting in a net increase in risk capital for the first quarter of $400 million.

Catastrophe bond pricing is up 50 percent year-over-year and remains elevated relative to historical pricing, a result of a number of factors, including the sale of catastrophe bond assets to meet liquidity obligations, distress in other asset classes and rate increases in traditional reinsurance markets.

• Overall, the insurance-linked securities (ILS) sector returned a 1 percent gain in the first quarter of 2009. Given the volatility in the broader markets, the ILS market remains a valuable alternative for investors, who appreciate the prevailing return profile and the non-correlation of underlying risk characteristics relative to other asset classes.

Market Outlook

• The consensus estimate for total cat bond issuance activity in 2009 stands at $3 billion, dependent on market conditions.

• This figure would result in an 11.1 percent year-over-year increase in catastrophe bond limits outstanding, and would see 2009 supplanting 2008 as the third busiest issuance year in the history of the catastrophe bond market.

“While it is still too early to say that the catastrophe bond market has put the financial catastrophe in the past, the resumption of issuance activity is a positive sign," said Chi Hum, Global Head of Distribution, GC Securities. "Though a return to the pace of 2007 is unlikely, we expect 2009 to be a busy year, with most issuances coming from experienced sponsors with clear risk management objectives and investment interest from specialists who are familiar with the territory.”

The full report is available at: http://www.gccapitalideas.com/2009/04/13/cat- bond-update-first-quarter-2009/


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