The majority of respondents plan to use company funds to make acquisitions (56 percent, compared to 54 percent in 2008’s survey), though company stock is another popular way to finance acquisitions (23 percent). As a result of the worldwide financial crisis, the use of institutions — such as private equity and bank financing — has fallen sharply. Last year, 27 percent of respondents indicated an interest in working with private equity partners, with 8 percent listing banks as a financing source. This year, they garnered only 3 percent and 5 percent, respectively.
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The third quarter is traditionally quiet for the catastrophe bond market, and 2009 was no exception. Two transactions were closed, resulting in USD412 million in new risk capital.1 Nonetheless, risk capital issued was up by a third relative to the same quarter last year, as both catastrophe bonds issued were upsized considerably. The consensus estimate for the entire year remains USD3 billion to USD4 billion, implying a strong fourth quarter for primary issuance.
- Issuance Activity
- Catastrophe Bond Redemptions
- Risk Capital Outstanding
- Issuance Composition
- Industry Loss Warranties
- Outlook for the Fourth Quarter
Property-catastrophe reinsurance rates increased by 15 percent at the Florida-centric June 1, 2009 renewal — compared to a 15 percent decline a year ago. Capacity was more limited than in recent years — however, still adequate to complete renewals. Though the ultimate result was higher than the 10 percent to 14 percent change for U.S. national reinsurers at April 1, 2009, the intricacies of the Florida market render it directionally consistent with the overall rate trend for this year. Constraints on capital have pushed risk-transfer pricing higher, but shortages were not so severe that rates spiked as they did in 2006.
A strong first quarter has demonstrated that catastrophe bonds are still important tools for risk managers, treasurers, and CFOs. After five months of silence since the last issuance in mid-August 2008, three bonds closed in the first quarter of 2009 bringing USD575 million in fresh capital and confirmation that these instruments are still attractive investments, despite the ongoing the global financial catastrophe. Investor marketing for a fourth catastrophe bond issuance began in the first quarter but is expected close in the early part of the second quarter. Issuance levels are consistent with the first quarter of 2008, a year that seemed likely to be the second-busiest in the history of the catastrophe bond market until the financial crisis accelerated in the fourth quarter of last year.
Gary Venter, Adjunct Professor, Statistics, Columbia University
Profit pressure is the norm for the insurance industry. For short periods, market conditions may favor the risk-taker, but they are rare. Quickly, this mature, competitive industry returns to tighter margins and a battle for market share. Thus, managing to survive the leaner years until the market turns for a moment does not lead to long-term success. Carriers should optimize for tough markets … and be ready for the occasional favorable swing.
Gary Venter, Adjunct Professor, Statistics, Columbia University
The reinsurance market is in an unusual state. The cost of capital increased last year, largely because of discord in capital markets. After five years of solid investment gains, the asset side of insurer and reinsurer balance sheets was hit by credit market calamity that bled into equity markets, as well. A busy catastrophe year, headlining Hurricanes Gustav and Ike in the Gulf of Mexico, caused severe damage. Together, however, these factors were insufficient to force a drastic change in the market. Reinsurance rates rose in pockets, but there was not a consistent universal outcome.
Quite frankly, it was different this time.
The catastrophe bond year ended back in July, and two quarters of virtual silence have signaled an abrupt change in the market. After 2006 and 2007, we had become accustomed to record-setting issuance years. Hopes were high for 2008, which was on track with the previous year through the beginning of the third quarter. Then, everything just stopped. Given how 2008 progressed, we cannot judge the catastrophe bond market as we would in a normal year. A worldwide financial meltdown affected the insurance and reinsurance industry deeply, creating conditions that will make 2009 unpredictable. Nonetheless, catastrophe bonds did demonstrate their resilience, indicating their likely importance this year.
A slow issuance year in 2008 masks a story of resilience and risk management flexibility. After a record-setting year in 2007, catastrophe bond issuances fell 62 percent by issuance volume and 52 percent by transaction count last year. During the first half of the year catastrophe bond issuance was tempered by ample capacity and favorable rates in the traditional reinsurance market, dampening sponsor demand for alternative capacity sources, with the fourth quarter quieter than expected. Overall, however, catastrophe bonds generally withstood the impact of onerous market forces and survived a substantial financial market test of their utility as risk and capital management instruments.
Market Information Department, Guy Carpenter
Property and financial catastrophes, combined with earlier stock buybacks, reduced Bermuda-based (re)insurer shareholders’ equity over the first three quarters of 2008. Even with a 7.5 percentage point increase to the Guy Carpenter Bermuda Composite’s combined ratio and an 86 percent drop in underwriting profits, this group of 17 companies appears to have resisted much of the force of the financial crisis and Hurricanes Gustav and Ike. These carriers remain well-capitalized heading into 2009.
Global Reinsurance Review January 2009
Reinsurance rate increases were moderate on average at the January 1, 2009 renewal. The Guy Carpenter World Rate on Line (ROL) Index rose 8 percent, in response to the dual pressures of a financial catastrophe and the second most expensive property catastrophe year on record. The degree to which prices increased was tempered by large capital positions at the beginning of 2008, enabling carriers to absorb the year’s losses, but this is where the generalizations end. Loss history, geography, and line of business led to wide differences in pricing. Expectations of another above-average storm year and the uncertainty surrounding the credit crisis underscore the need for continued capital management discipline in the coming year.