Forecast: Busy CAT Bond Season Ahead

Guy Carpenter's optimistic CAT bond report jibes with word from industry insiders.

By MATTHEW BRODSY, senior editor/Web editor of Risk & Insurance®

If the catastrophe bond market were a hurricane, we'd be getting NOAA reports about how it was re-strengthening and soon to return to major storm status on its way to landfall in New York, Bermuda, Munich, Zurich or any of the other reinsurance and capital markets capitals.

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It isn't a hurricane, so let's stick with a business forecast: "Catastrophe bond issuance activity will continue, and the asset class should actually emerge with improved utility for both sponsors and investors," wrote the authors of a briefing on the market from reinsurance intermediary Guy Carpenter & Co., a division of Marsh & McLennan Cos.

These authors confirm (or were confirmed) by the presentations and cocktail chatter at the recent 5th Annual Insurance Linked Securities Summit in New York (read our full write-up on this event here).

"We like this asset class on a long-term basis," said Niraj Patel, managing director of credit derivatives and ILS at Genworth Investments, during a panel on investor perspective.

"There's a very serious interest in doing more in this market," said Paul Schultz, president of Aon Benfield's Investment Banking Group. "Everyone wants to consider it, everyone wants to find a way into the marketplace."

Investors and insurers needed some reassuring after the plummet in CAT bonds in late 2008. Issuances fell 62 percent by volume and 52 percent by transaction count, reported Guy Carpenter. Risk capital outstanding in bonds slipped from $13.8 billion to $11.8 billion. Still, 2008 was the third busiest year on record, yet was still perceived negatively, due to the overall gloom in the financial world and because of the preceding two record-setting years.

And they could use some continued reassurance in 2009. While at least one new bond has been birthed this year (Scor's Atlas Reinsurance V Ltd.), another has gone bust (Allstate's Willow Re). Willow was among four marked-down CAT bonds linked to bankrupt Lehman Brothers, which was involved in protecting collateral and investor returns.

March 3, 2009

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