The catastrophe bond market is experiencing a growth surge driven by two huge hurricane seasons, according to a report released yesterday by Guy Carpenter & Company Inc.

According to the study's findings in 2005 the catastrophe bond markets saw major growth propelled by the increased number of major storms to hit the United States.

"The story of the catastrophe bond market in 2005 was the story of U.S. hurricane activity, principally Hurricane Katrina," said Christopher McGhee, head of Guy Carpenter's Investment Banking Specialty Practice and managing director of MMC Securities.

"Prior to 2005, cat bond investor demand far outstripped supply, but the 2005 storms have reversed this trend," he added.

"Not only did we witness record highs in terms of total risk capital issued, total risk capital outstanding, number of bonds placed and number of first-time sponsors, but the market also suffered its first significant loss to a publicly disclosed catastrophe bond."

The catastrophe bond market recorded total issuance of $1.99 billion in 2005, according to the study, a 74 percent increase over the $1.14 billion issuance in 2004 and 15 percent higher than the previous record of $1.73 billion issued in 2003.

At $4.90 billion by the end of 2005, total risk capital outstanding in the market had increased by 21 percent from the 2004 level of $4.04 billion and 42 percent from the $3.45 billion at year-end 2003.

In addition to the unprecedented growth, 2005 also tied the record for the number of transactions during the year--ten--which last occurred in 1999.

Last year also saw the first significant loss to a publicly disclosed bond when Hurricane Katrina caused a total loss to the KAMP Re 2005 Ltd. issuance, a $190 million transaction.

"We have seen a number of important market developments as a result of Katrina, and to a lesser extent, Hurricanes Rita and Wilma," said Mr. McGhee.

"Rating agencies," he said, "are revising their capital requirements upward for insurers and reinsurers with catastrophe exposures, while modeling firms have also announced plans to revise their models.

"This has led to substantial uncertainty concerning 2006 renewal pricing, as well as a dramatic rise in the cost of reinsurance for companies that had suffered catastrophe losses in 2005."

According to the report, the catastrophe bond market did see some tightening in capacity toward the end of 2005, due to an increased number of bonds being issued in a short period of time and the move by some multi-strategy hedge funds to invest in reinsurance firms rather than cat bonds.

However, the report found that demand for bonds remains high, and that the tightening of catastrophic underwriting by insurers and the revamping of cat modeling has led to substantial increase in inquiries by insurance and reinsurance companies looking to make use of bonds to supplement their traditional reinsurance.

The report titled "The Catastrophe Bond Market at Year-End 2005: Ripple Effects from Record Storms" was released by Guy Carpenter's New York office. The firm is part of Marsh & McLennan Companies. Their report is online at www.guycarp.com.

Special Reports /

Report: Cat Bond Market Booming

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