Key to Cat Bond, ILW Issuance in 2010: Rates and Spreads

Although spreads on catastrophe bonds have dropped 40 percent since 2009 and rates offered by industry loss warranties (ILWs) have stabilized they continue to find tough competition from a soft reinsurance cycle, according to a report issued today by Guy Carpenter Securities.

But issuers will find enough of a price rationalization to at least replace existing bonds set to expire and hedge their bets against an already difficult loss year.

“Sponsors have certainly taken note of this price tightening, particularly in the context of what will likely prove to be the most costly first quarter (measured by insured losses) on record,” says Guy Carpenter’s first quarter catastrophe bond report titled Heavy Smoke, Some Fire… Encouraging Conditions Persist.

The report argues that the second quarter of 2010 should prove significantly more active than the first which saw only $300 million in new catastrophe issuance in two structures.

“While transaction activity is always difficult to predict, estimates of between 5 and 10 second quarter transactions are not unreasonable in our view, with total issuance for the year ranging from $3 billion to $5 billion,” the report says.

Guy Carpenter argues that spread on catastrophe bonds will continue to tighten throughout the remainder of the year allowing them to compete with traditional reinsurance more effectively.

Additionally, most ceadants have returned to the ILW arena after ignoring the structures in prior months as rates fluctuated significantly, the report adds.

“Cedents’ appetites for absorbing catastrophe losses have shrunk following the recent earthquake in Chile so they have begun exploring additional cover for peak territories,” the report says. “As the U.S. hurricane season approaches, ILW market activity is likely to increase further.”

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