Guy Carp Analyzes Cat Bond Market

February 29, 2008

Guy Carpenter & Co. and GC Securities, its investment banking arm, announced publication of “The Catastrophe BondMarket at Year-End 2007: The Market Goes Mainstream.” The report is the sixth annual review of catastrophe bond transaction activity and market dynamics, and the first jointly conducted under the GC Securities banner.

It provides an overview of 2007 securitization activity involving natural catastrophes, including catastrophe bonds and sidecars.

According to the report, the strong catastrophe bond market momentum noted in 2006 intensified in 2007, “with issuance accelerating rapidly even as rates softened for traditional reinsurance capacity. At year-end, cat bond risk capital outstanding reached $13.8 billion, a 63 percent increase over the previously record-setting 2006 year-end total of $8.5 billion. Moreover, cat bond risk principal now accounts for 8 percent of property limits worldwide and 12 percent on a U.S.-only basis.”

Christopher McGhee, Managing Director and head of GC Securities, noted: “2007 was the year when catastrophe bonds became a fundamental, mainstream vehicle for catastrophe risk management. After a decade of refinement, capital markets risk transfer tools have matured substantially and are now a valuable and standard supplement to traditional reinsurance.”

He added that, as the industry increasingly turns to the capital markets as a source of capacity, “we expect to see more progress, continued innovation and even greater stability ahead.”

2007 produced around $7 billion in “publicly disclosed catastrophe bond issuances,” the most in any one year period. “Publicly disclosed issuances showed a 49 percent increase over the record of $4.7 billion in 2006 and 250 percent over the $2 billion issued in 2005.” There were 27 transactions completed in 2007, “also a new high, exceeding the previous mark of 20 in 2006 and nearly tripling the ten placed in 2005. Since 1997, when the market began in earnest, 116 catastrophe bonds have been issued, with total risk limits of $22.3 billion. 52 percent ($11.7 billion) of that total came in the last two years.”

McGhee added: “The growth of 2007 was truly ten years in the making. Partially as a result of the difficult post-Katrina circumstances of 2006, the market has come to understand the ability of capital markets to deliver capital quickly and efficiently. At the same time, insurers should be commended for their ability to adapt their perception of their own risk profiles and embrace these powerful new solutions.”

The report also noted the following findings:
Indemnity-Triggered Cat Bonds – These vehicles staged a comeback, with a total of five indemnity-triggered transactions representing $2.3 billion of issuance concluded in 2007. Excluding State Farm’ s $1.1 billion Merna transaction (the largest single transaction in the market’ s history), $1.2 billion remains. The adjusted total marks a 44 percent increase over the record high of $859 million in 2005 and is more than a seven-fold increase over the $173 million issued during 2006.

New Market Participants – A number of first-time cat bond sponsors utilized capital market solutions in 2007, including U.S. insurers Allstate, Chubb, Travelers and State Farm. Cat bond limits sponsored by these four companies alone totaled $2 billion, with State Farm accounting for just over half the total.

Shelf Offering Programs Dominate – Shelf offering programs accounted for the majority of issuances, demonstrating the broad-based commitment of sponsors to a secure, diversified source of risk capital. New shelf offerings and takedowns from existing shelf offerings accounted for 21 of the 27 transactions completed, representing more than 70 percent of total risk capital issued.

Cat Bond Spreads Tighten – Despite turmoil and wider spreads in the broader credit markets, spreads for catastrophe bonds continued to tighten, demonstrating resilience and further validating their viability as an asset class that exhibits non-correlative behavior relative to the general financial markets.

The full report, The Catastrophe Bond Market at Year-End 2007: The Market Goes Mainstream, is available for download at: . For printed copies, contact Guy Carpenter at:

Source: Guy Carpenter

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