Onerous market forces in 2008 brought on by turmoil in the global capital markets did not impact cat bond market activity, according to a briefing published by Guy Carpenter & Co. LLC, a global risk and reinsurance specialist and part of the Marsh & McLennan Cos., and GC Securities, a division of MMC Securities Corp.
As a whole, in terms of issuance volume, 2008 was the market’s third most active year since catastrophe bonds were introduced in 1997, accounting for 11% of all issuances, notes the report.
Thirteen issuances, all but two of which occurred in the first half of the year, brought $2.7 billion in new and renewal capacity to market in 2008, according to Guy Carpenter’s findings. After a record-setting year in 2007, cat bond issuance in 2008 fell 62 and 52% in terms of risk capital and number of transactions, respectively.
The report also found that after the events of mid-September 2008, several firms that were planning catastrophe bond issuances for the fourth quarter elected to defer those issuances to the first quarter of 2009. As a result, the total amount of risk capital outstanding dropped 14.5%, from $13.8 billion at year-end 2007 to $11.8 billion at year end 2008.
“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,” said David Priebe, Chairman of Global Client Development at Guy Carpenter. “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.”
Chi Hum, Global Head of Distribution, GC Securities, said, “We see an increasing number of companies integrating catastrophe bonds into their reinsurance purchase decisions as an important complement to fill gaps in traditional capacity.”
“We expect to see more transparency and tightened collateral requirements in 2009,” added Priebe. “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.”
Other report findings include:
Ambiguity became a key factor — Ambiguity in the (re)insurance market as a whole – and outright distress in the global financial markets – was the primary driver behind the sharp drop in fourth quarter cat bond issuances year-over-year.
Non-correlation with broader credit markets demonstrated — Non-correlation initially was called into question in the case of four cat bonds that were marked down due to the loss of their total return swap (TRS) counterparty. As more details emerged, however, the moral hazard issues endemic to other credit related asset classes were ruled out as systemic concerns for the cat bond market, though they are potential areas for improvement for future transactions.
Risk capital above average — The $2.7 billion issued in 2008, which came to market at a time when reinsurers had excess capital on their balance sheets, 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.
2009 Outlook — 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. The extent of the revival will hinge on the prevailing supply and demand conditions for risk transfer capacity in both the traditional reinsurance and capital markets.
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