Cat Bonds Buck Credit Crunch Says S&P Report

September 2, 2008

Standard & Poor’s Ratings Services has released findings, which show that ‘natural catastrophe bonds (‘nat cats’) have proven generally resilient during the capital market’s turbulence over the past year.” They are currently the “main insurance linked securities (ILS) asset class,” said S&P.

“The acid test for this asset class has been the current ‘credit crunch,’ which has seen a dislocation in performance between the nat cat bonds and traditional structured finance and corporate asset classes,” explained credit analyst David Harrison. “Nat cat bonds have so far appeared to be immune to the market’s disruptions.”

S&P added that to “date this year, most ILS issuance has been of nat cat bonds, which in terms of pricing have shown a strong link to the underlying sector’s fundamentals–such as their reinsurance capacity and risk pricing–and a very limited link to the repricing being seen in the traditional credit markets.”

Harrison stated: “In our view it appears the limited or lack of correlation to traditional financial instruments has manifested itself in the pricing trends and recent outperformance of nat cat issues.”

In addition S&P noted that “continued innovation in ILS is providing a mechanism that allows the capital markets to participate in a variety of risks traditionally borne by the insurance sector.”

Harrison forecast that ILS capacity will continue to grow in importance for the insurance sector in the next few years and the variety of risks covered will increase. “The fundamentals that will drive the growth in the ILS market are strong with an expected increase in insurable risk outpacing expected capital growth in the industry. However, volumes in established ILS products are likely to decline in 2008 from a combination of factors,” he explained.

A copy of the report, titled “Nat Cat Insurance Bonds Buck The Credit Crunch Trend” and published on Aug. 27, 2008, can be found on RatingsDirect, the real-time Web-based source for Standard & Poor’s credit ratings, research, and risk analysis, at Alternatively, call one of the following Standard & Poor’s numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow (7) 495-783-4017.

Source: Standard & Poor’s –

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