Third Quarter Cat Bonds Were Good, Fourth Quarter Needs to Be Great

Dedicated managers and reinsurers kept the catastrophe bond market in recovery for the third quarter, but their appetite will need to be veracious for the next three months in order to keep up with full year growth projections.

With multi strategy hedge funds on the sidelines — which at one point represented 20 percent of the cat bond market — traditional investors will need to continue to snap up new issuance or be willing to accept significantly upsized deals.

“You are seeing more dedicated [cat bond] funds backed by institutional investors,” says Chi Hum, managing director with Guy Carpenter Securities in New York. “There are some significant changes to the structural elements of this market.”

According to a report issued by Guy Carpenter today, total new issuance of catastrophe bonds was $412 million in the third quarter of 2009, keeping ahead of maturing issues of $300 million.

That is a 28 percent increase over total new issuance of $320 million during the same period last year.

The third quarter was entirely made up of two issues; $200 million Parkton Re Ltd. (which covers windstorm losses in North Carolina) and EUR 150 million Eurus II Ltd. (which covers European windstorm risk.)

A total of $1.79 billion in catastrophe bonds have been issued so far this year representing 11 different structures, according to the Guy Carpenter report.

However, it’s the fourth quarter of the year that industry professionals are looking towards to define the catastrophe bond market’s comeback from the brink following the 2008 collapse of Lehman Brothers.

Expectations for the fourth quarter are high, with Guy Carpenter saying that up to $2.2 billion in cat bonds would need hit the market in order to match 2009 full year primary issuance expectations of between $3 billion and $4 billion.

If achieved, that would mean the last three months of the year would represent nearly 50 percent of total issuance for 2009.

Hum says that although issuing that amount of successful cat bonds being would be difficult, it is not impossible since trading prices of existing cat bond issues are starting to firm and attracting investors.

“I think that investors are looking at the returns of the secondary market, so now there are quite a lot of deals in the pipeline,” Hum said.

Also, a new investor profile of the catastrophe bond market is beginning to take shape as hedge funds remain sidelined by liquidity issues and institutions become more comfortable with the asset class.

That’s a positive for catastrophe bonds for the long-term since institutional investors are unlikely to sell their holdings at a discount and remain invested for the long term.

“I think there is a more stable profile to the investor base,” Hum added, explaining that hedge funds assets are often considered “hot money” that quickly leaves when returns are depressed. “That’s a positive since you don’t have a hugh portion of your investors base supporting a two and twenty.”

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