Cat Bonds Continue Struggle with Hopes of a Fourth Quarter Rally

The $11 billion catastrophe bond market continues to struggle towards recovery with industry professionals hoping for a late year rebound to match their already lowered expectations, a new report issued today by reinsurance broker Guy Carpenter says.

The report titled “Cat Bond Update: Second Quarter 2009” and published on the firm’s GC Capital Ideas blog says that in order for the cat bond market to rebound two things need to happen: the broader financial market needs to remain stable and spreads on new issues need to decrease.

“”If this year’s hurricane season generates significant insured damages or if an improvement in financial market conditions does not continue, catastrophe bond spreads are likely to remain high or even widen further relative to current levels.” the report says.

Current cat bond spreads — as much as 25 percent to 50 percent above 2008 levels — have kept investor interest but are difficult for issuers to sustain. Boosting yields has become even more difficult given the problems of catastrophe bond collateral programs following the collapse of Lehman Brothers in 2008.

Given the limited issuance and investor appetite for higher yielding paper, expanding the market to non-peaks perils has also faced obstacles. The report said that 87 percent of second quarter issuances ($704 million) had exposure to peak perils such as U.S. windstorm and U.S. earthquake.

“In an environment in which investors are more sensitive to minimum return targets relative to diversification benefits, sponsors were inclined to access the catastrophe bond market for key peak perils,” the report explains.

Overall, the report struck an optimistic tone arguing catastrophe bonds are poised for a significant comeback given it’s collapse of 2008.

Link: Cat Bond Update: Second Quarter 2009

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