Cat Bonds Come of Age as Capital Markets Solutions Are Increasingly Embraced by Industry in Third Consecutive Record-Setting Year
New York, February 28, 2008 – Guy Carpenter & Company, LLC, the leading global risk and reinsurance specialist, and GC Securities, Guy Carpenter’s investment banking arm, today announced the publication of The Catastrophe Bond Market at Year-End 2007: The Market Goes Mainstream. The report – Guy Carpenter’s sixth annual review of catastrophe bond transaction activity and market dynamics, and its first jointly conducted under the GC Securities banner – 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.
“2007 was the year when catastrophe bonds became a fundamental, mainstream vehicle for catastrophe risk management,” said Christopher McGhee, Managing Director and head of GC Securities. “After a decade of refinement, capital markets risk transfer tools have matured substantially and are now a valuable and standard supplement to traditional reinsurance.”
Mr. McGhee added, “With the industry increasingly relying on the capital markets as a source of capacity, we expect to see more progress, continued innovation and even greater stability ahead.”
With $7 billion in publicly disclosed catastrophe bond issuances, 2007 stands as the most active year in the history of the market. 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. In addition, 27 transactions were 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.
“The growth of 2007 was truly ten years in the making,” added Mr. McGhee. “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.”
Among the report’s other 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 noncorrelative 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 http://www.guycarp.com/. For printed copies, please contact Guy Carpenter at [email protected]
About Guy Carpenter
Guy Carpenter & Company, LLC is the world’s leading risk and reinsurance specialist and a part of the Marsh & McLennan Companies. Guy Carpenter creates and executes reinsurance solutions and makes available capital market solutions* for clients worldwide through 2,600 professionals across the globe. The firm’s full breadth of services includes 16 centers of excellence in Accident & Health, Agriculture, Alternative Risk Transfer, Environmental, General Casualty, Investment Banking*, Life & Annuity, Marine & Energy, Professional Liability, Program Manager Solutions, Property, Retrocessional, Structured Risk, Surety, Terror Risk, and Workers Compensation. GCFac®, Guy Carpenter’s dedicated global facultative reinsurance unit, provides the placement strategies, information and timely market access that are critical to obtaining strategic facultative reinsurance. In addition, Guy Carpenter’s Instrat® unit utilizes industry-leading quantitative skills and modeling tools that optimize the reinsurance decisionmaking process and help make the firm’s clients more successful. Guy Carpenter’s website address is http://www.guycarp.com/.Tags: Guy Carpenter, Natural Catastrophes