Given the ominous cloud of negative press hanging above the P&C industry lately, a new briefing from Guy Carpenter & Co. LLC may be a ray of sunlight indicating the haze is about to break. The catastrophe bond market is weathering the effects of the global financial downturn while maintaining a strong issuance pipeline for the remainder of 2009, says the global risk and reinsurance specialist, which partnered on the report with GC Securities, a division of MMC Securities Corp.

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.

While the number of catastrophe bond transactions in the first quarter of 2009 was equal to those in the first quarter of 2008, according to the brief, the amount of risk capital was effectively unchanged year-over-year (down 6.5% from $615 million). However, cat bond pricing is up 50% year-over-year, Guy Carpenter says, 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.

“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,” says 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 consensus estimate for total cat bond issuance activity in 2009, according to the brief, stands at $3 billion, dependent on market conditions. If the figure stands up, it would result in an 11.1% 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.

Additionally, the briefing notes the insurance-linked securities (ILS) sector returned a 1% 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.

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