Catastrophe bonds poised for comeback this year, Guy Carpenter & Co. says

Though fewer catastrophe bonds were issued during the first half of 2009, investors may see more of these issuances in the second half of the year as the financial markets stabilize, according to a report from Guy Carpenter & Co. LLC and GC Securities, both of New York. During the first half of the year, nine cat bonds were issued, six of them in the second quarter. In total, the nine bonds make up an aggregate risk capital of $1.38 billion. In comparison, the first half of 2008 saw 11 cat-bond issuances, generating $2.4 billion in risk capital. Pricing conditions, among other factors, helped lower risk capital issuances by 42% year-over-year for the first half of 2009. Cat bonds are risk-linked securities — often structured as floating-rate bonds — that transfer specific risks to investors from insurance and reinsurance companies. If a certain trigger condition occurs — namely a situation linked to a major catastrophe — then investors can lose their money. The majority of cat bonds were sponsored by carriers, who were responsible for $680 million, or 84% of all issuances in the second quarter. Reinsurer issuances made up the remaining 16%, or $128 million. If the financial markets continue to stabilize and cat-bond spreads drop, issuances could go up in the second half of the year, especially for carriers who held off on bond issuance because the protection was too expensive, according to the report. “A number of converging factors could lead to an increase in catastrophe bond activity in the second half of 2009, spurring sponsors who may have postponed issuances in the first and second quarters of the year,” David Priebe, chairman of global client development at Guy Carpenter, said in a statement. “These include a continued improvement in the broader capital markets and an increase in risk capacity.” However, Mr. Priebe noted that if hurricanes create major insured damages or if financial markets don't improve, the spread between the cat bonds and the London Interbank Offered Rate will stay high and perhaps widen. Unless those two events take place, the firm expects cat-bond spreads to narrow in the second half, he said. Over the first six months of the year, global insured losses due to severe weather totaled $11 billion, with economic losses hitting $25 billion, according to data from Munich Re Group, the German reinsurer. Between January and June 2009, some 380 natural catastrophes took place, according to Munich Re.