Report: Cat Bond Market Off '07 Pace, But Did Well In '08

Although 2008 was well off of the record-setting 2007 pace for catastrophe bond issuance, the cat bond market generally withstood the impact of negative market forces for the year, Guy Carpenter & Company reported.

The brokerage's study, "Cat Bonds Persevere in Tumultuous Market," shows 2008 was the third most active year for the cat bond market since the bonds were introduced in 1997.

The year saw $2.7 billion in new and renewal capacity, derived from 13 issues. In 2007, there were 27 bond issues, accounting for $7 billion in capacity. The 2008 figures also lagged behind 2006 totals, which saw 20 issues for $4.7 billion in capacity.

The report notes that 2008 kept pace with 2006 through the first two quarters. The numbers did not hold up to 2007 in the first half of the year, notes the report, because of ample capacity and favorable rates in the traditional reinsurance market.

Activity in the third quarter was light, the report says, but that is in line with historical precedent.

But the report says the fourth quarter "was silent in terms of primary issuance activity compared to that of 2007, when seven bonds resulted in $1.9 billion of capacity."

The fourth quarter was expected to be robust, the report explained, but planned catastrophe bond issuances were postponed due to the impact of the global financial crisis and ambiguity in the (re)insurance market.

"As the (re)insurance industry approached the Jan. 1, 2009 renewal, few could gauge where rates were headed for specific regions and lines of business. Loss history ultimately mattered more than the other factors that influence pricing, but at the time, carriers decided to confirm the market's direction before making specific and (in the case of catastrophe bonds) multiyear risk management decisions," Guy Carpenter said.

Of the 13 issues for the year, all but two occurred in the first two quarters, according to the report. But the $2.7 billion issued was higher than the 11-year average of $2.1 billion. "Despite continued buybacks and dividends--and favorable pricing for cedents--carriers saw a benefit to transferring risk to capital markets," Guy Carpenter said in a statement.

David Priebe, chairman of Global Client Development at Guy Carpenter, said, "Put to the test by the unprecedented circumstances of 2008, the cat bond market proved its resilience as the market absorbed the impact of concurrent financial and property catastrophes. And, while cat bond spreads did increase during the tumultuous days of September, they did not do so at the same rate as the credit markets generally."

For 2009, Guy Carpenter said disciplined risk and capital management as well as funding diversification will persist as critical focus areas during 2009. "In this type of environment, the cat bond market offers significant value to both sponsors and investors and therefore issuance activity should revive in the coming year," Guy Carpenter said.

"We expect to see more transparency and tightened collateral requirements in 2009," Mr. Priebe explained. "Cat bond issuance activity likely will eventually rebound as conditions improve, and as an asset class, cat bonds should offer improved utility for both sponsors and investors."