Insurance securitizations strengthen record and novel issuance in 2007

Catastrophe bond market momentum intensified in 2007, despite softening prices for traditional reinsurance capacity. At the end of the year, the outstanding risk capital reached a record $13.8 billion, compared to the previous record level of $8.5 billion set just 12 months previously, according to Guy Carpenter & Company, and GC Securities, Guy Carpenter’s investment banking arm.

Cat bond risk principal now accounts for 8% of property limits worldwide and 12% for the United States only, according to The Catastrophe Bond Market at Year-End 2007: The Market Goes Mainstream. The report is Guy Carpenter’s sixth annual review of catastrophe bond transaction activity and market dynamics, and its first jointly conducted under the GC Securities banner.

With $7 billion in publicly disclosed catastrophe bond issuances, 2007 stands as the most active year in the history of the market. This was a 49% increase over the record of $4.7 billion in 2006. 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% ($11.7 billion) of which were in the last two years. US earthquake and windstorm are the most commonly securitised risks over these ten years, followed by European windstorm and Japanese earthquake. Reinsurers issued 59 of the bonds, insurers 51 and corporate sponsors six.

Among the report’s other findings:

• Indemnity triggered cat bonds came back.

• A number of cat bond sponsors used capital market solutions for the first time in 2007, including US insurers Allstate, Chubb, Travelers and State Farm.

• Spreads for catastrophe bonds continued to tighten, despite turmoil and wider spreads in the broader credit markets.