The German underwriting giant predicts that cat bond issuance this year may well hit $5 billion.

With no new bonds being issued at the end of 2008 in the wake of the financial crisis, the market rallied last year. The volume of new bonds issued came to just under $3.5 billion. The sum total exceeded the volume of expiring bonds so that overall the outstanding bonds rose marginally to just under $12bn. The spread required by investors also returned to previous levels.

“For 2010, the volume of new issues is expected to be in the region of $ 5 billion, with interest rates falling slightly,” said the reinsurer in a statement.

It added clear trends were emerging in the sector across last year and the key was that by far the largest share of new catastrophe bond issues in 2009 involved US risks: more than four-fifths of the volume issued related to windstorm and earthquake risks in the USA.

 

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. “This year will see the expiry of bonds totalling $ 4.5 billion and the proceeds will need to be reinvested. The good performance of the catastrophe bond market also during the financial crisis should ensure an influx of capital of around US$ 1 billion into funds specialising in such bonds. In addition, the basic interest shown here by new investors such as pension funds should translate into further growth in the medium term.”

 

“The insurance securitisations sector also learned a few lessons from the financial crisis. Today’s structures are such that investors can now be sure they are really investing only in insurance risks”, said Munich Re Board member Thomas Blunck. “As investor confidence grows and return expectations fall to appropriate levels, catastrophe bonds can again assume their intended role. The capital market is a supplementary risk carrier especially for peak risks for which capacity is in short supply in the traditional insurance market.”