Despite the challenging financial conditions of late 2008 and early 2009, the catastrophe bond market continued to play a critical role for both sponsors and investors over the past 12 months. Throughout the year, as financial markets stabilized generally, catastrophe bond issuance conditions continued to improve. In 2009 USD3.4 billion of risk capital was issued through 18 transactions. In terms of risk capital, this is a 25 percent increase over 2008. After declining over the first two quarters of 2009, total catastrophe bond risk principal outstanding increased from USD12.0 billion at year-end 2008 to USD12.2 billion at year-end 2009, reflecting a particularly strong fourth quarter for issuance.
Pricing and capacity conditions in the cat bond market were dramatically different between the first and second halves of 2009. In the first and second quarters, with the turmoil of late 2008 still a dominant concern, cat bond pricing was in some cases up nearly 50 percent relative to early 2008, remaining elevated relative to both historical precedent and the traditional reinsurance market.
Source: GC Securities*
In the third and fourth quarters, pricing declined 25 percent to 40 percent and, depending on transaction features, is now tracking with 2007 levels. Drivers for this market reversal include: stabilizing financial conditions generally; elevated pricing in the first half, forestalling planned issuances (as some sponsors were reluctant to issue into a distressed environment); cat bond maturities and net new inflows to the asset class generating investable cash; and the acknowledgment by market participants that the spread levels of early 2009 were unsustainable when ample traditional reinsurance capacity remained available at far cheaper pricing.
Heading into 2010, the catastrophe bond market continues to provide an increasingly attractive and worthwhile supplement to sponsors’ risk transfer programs. Aside from what could potentially prove to be attractive levels to lock in fixed pricing on a multi-year basis, other transaction features such as trigger mechanics and choice of collateral solution (among other features) continue to progress and offer greater value to protection buyers and sellers. The market also remains focused on further reducing transaction costs and transaction time requirements in order to improve the overall efficiency of catastrophe bond risk transfer solution.
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* Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities Corp., a US registered broker-dealer and member FINRA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd., which is authorized and regulated by the Financial Services Authority. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities Corp., MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product.