Catastrophe bond market still down year-on-year but looking healthier all the time

Guy Carpenter have published their 2nd quarter of 2009 catastrophe bond market update on their excellent GCCapitalideas blog. Here’s a brief summary, the link the full report can be found at the bottom of this post.

Six cat bonds have been issued in the 2nd quarter of 2009, eight were issued last year leaving us 25% down y-o-y. 2009 so far is down 42.5% in actual risk capital issued. This isn’t seen as a concern as the market is still recovering from the 2008 slump, and actually issuance is pretty healthy given the factors that are still affecting all the other financial markets. Investor confidence is returning too, helped by the innovation around collateral provision.

Risk Capital Outstanding

• From the 1st quarter of 2009 to the 2nd quarter of 2009, net cat bond risk capital outstanding fell $779 million (6.5%), from $12 billion to $11.2 billion, as maturities outpaced issuances.
• The 2nd quarter of 2009 was the second consecutive quarter in which total risk capital outstanding declined.
• Overall, cat bond risk capital outstanding is currently at mid-year 2007 levels.

Pricing and Capacity

• Cat bond spreads were consistent from the 1st quarter of 2009 to the 2nd – up 25% to 50% relative to 2008 levels.
• Three of the six transactions in the 2nd quarter of 2009 upsized relative to initial announced placement targets, as the market reacted positively to the relatively high yields.

3rd Quarter 2009 Pipeline

• Two cat bond transactions are currently planned for the 3rd quarter of 2009: one with European windstorm exposure and one with U.S. windstorm exposure.
• Historically, the 3rd quarter has accounted for only 14% of risk capital issued, largely a quiet period because of hurricane season and traditional renewal dates.

Triggers

Indemnity triggers made up the bulk of issuances with modelled loss triggers second most prevalent:

• Indemnity: USD250 million (31%)
• Modeled-Loss: USD180 million (22%)
• Weighted PCS (Index): USD150 million (18.6%)
• Multiple Triggers: USD127.6 million (15.8%)
• MITT: USD100 million (12%)

Collateral

We saw further innovation in collateral provision with more choice now emerging which should help issuances to be accepted more readily by investors. The options available now are:

1. Total return swap with FDIC-guaranteed bank debt
2. Bank deposit
3. Tri-party repurchase agreement
4. Customized putable notes
5. U.S. Treasury Money Market funds

The holy grail of collateral provision has yet to be found though, we expect to see further alternatives emerge through the rest of this years issuance.

Guy Carpenter sees a healthy outlook for the rest of 2009 and mentions that sponsors who have shied away from the market so far this year may venture back as the cost of issuance becomes a little more reasonable to bear.

You can read the full report here.