Convergence Quarterly: Where insurance and the capital markets meet
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Convergence Quarterly: Where insurance and the capital markets meet

The cat bond market has been given an overhaul and come back with a vengeance. But can the good times last?

This article appears courtesy of Reactions06 May 2009 If someone had said six months ago that catastrophe bond issuance at the end of April 2009 would exceed the level seen in the first four months of 2007 and 2008, few would have believed them.

The insurance-linked securities (ILS) markets dried up in the second half of last year, largely as a result of the collapse of investment bank Lehman Brothers, which was the total return swap (TRS) counterparty for several high-profile cat bonds.

The effects of Lehman’s downfall were two-fold. Some investors shied away from ILS for fear of further defaults. At the same time multi-strategy hedge funds began to sell their positions in the market to fund redemptions caused by the Lehman fiasco. This led a boom in the secondary market for ILS, but lowered demand for new issuances.

Now those secondary deals are gone, and the cat bond market has made a triumphant comeback at the start of 2009.

There were five issuances in the first quarter alone. By April 30, the number of issuances had risen to seven, with a combined value of $815m. And shortly afterwards, Assurant entered the cat bond market for the first time with its two-tranche cat bond Ibis Re, bringing total 2009 cat bond issuance to $965m.

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