Global cat bond market rebounds in 2009

The global catastrophe bond market staged a recovery in 2009, according to Munich Re.The volume of new bonds issued in 2009 came to just under $3.5 billion, and overall the value of outstanding bonds rose marginally to just under $12 billion.Munich Re anticipates the volume of new cat bond issues in 2010 to be in the region of $5 billion, with interest rates falling slightly.“The insurance securitizations sector also learned a few lessons from the financial crisis,” Munich Re board member Thomas Blunck said in a statement. “Today’s structures are such that investors can now be sure they are really investing only in insurance risks.”Many new issues are now secured through money market funds and state-guaranteed securities, so that “investors can again be confident they are primarily taking on an insurance risk that is no longer accompanied by a credit risk they cannot properly assess,” Munich Re says.Other trends in the 2009 cat bond market include:•    As a consequence of the collapse of investment bank Lehman Brothers, the spread required by investors had increased significantly in early 2009, since many hedge funds were forced to sell bonds on the secondary market. In the third and fourth quarters, however, risk premiums again sank appreciably.•    “The composition of investors has clearly shifted towards specialized funds and insurers or reinsurers.” Blunck said. “At the same time, hedge funds have become less important.”•    By far the largest share of new catastrophe bond issues in 2009 involved U.S. risks: more than four-fifths of the volume issued related to windstorm and earthquake risks in the United States.•    Overall, the prices for catastrophe bonds from the second quarter have reverted to mid-2008 levels. “Prices indicate that the market has recovered,” said Rupert Flatscher, Head of Munich Re’s risk trading unit.