Four more deals to take cat bond issuance past $3 bln

LONDON Fri Dec 4, 2009 10:48am EST

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LONDON Dec 4 (Reuters) - Total issuance of catastrophe bonds this year should surpass the $3 billion target earmarked by many market analysts, with four more cat bond deals still to close before the year's end, according to market sources.

Swiss Re's RUKN.VX Successor X marks the fifteenth catastrophe bond to be issued in 2009, while French reinsurer Scor (SCOR.PA) is marketing its Japanese earthquake and European windstorm at 75 million euros, which is expected to close this month.

Meanwhile, Swiss Re is said to be marketing its California earthquake transaction, Redwood XI, and up to five companies are involved in US Northeast hurricane bond Longpoint Re, according to a number of market sources.

"To achieve a nearly $3 billion figure in issuance is a considerable success given the challenges the sector and the broader economic environment have faced in the last 24 months," Michael Halsband, a vice president on the financial institution structured finance desk at Goldman Sachs, told Reuters.

"Considerable discipline has been brought to the market in 2009, as witnessed by the successful reintroduction of tighter collateral structures and greater transparency -- both key elements where the investors and sponsors interests are aligned."

One market investor, who did not want to be named, said there may also be another deal in the market that is "most likely to cover California earthquake as well," but refused to give more details.

Currently, there is $450 million of issuance capacity left in the market for the cat bond sector to hit the target figure of $3 billion. The close of Multi Cat Mex at $290 million, Montana Re at $175 million, Vita Capital IV at $75 million and Successor X at $150 million in the fourth quarter has brought issuance up to $2.550 billion.

With no cat issuance in the last quarter of 2008, due to the state of capital markets during the credit crisis, a year end total of $3 billion is seen as a return to form for the insurance-linked securities (ILS) sector.

Chi Hum, global head of distribution, GC Securities, Guy Carpenter, said tighter and more innovative collateral structures has taken away the credit risk of a transaction.

"The market has been able to structure a treasury collateral package that essentially takes away credit risk, which is an extreme solution, but a reaction to the market dislocation last year."

A new range of products means there is no longer one approach to collateral -- the total return swap (TRS). The failure of Lehman Brothers in September 2007, which played a counterparty role in several cat bonds, highlighted the potential weaknesses of TRS collateral solutions.

In addition, movements in pricing should encourage a number of sponsors to come to market in first half of 2010. The tightening of terms and conditions and continuing discipline in the structuring of the transactions will allow the market to continue to stabilise as it matures further.

"Risk placed in the fourth quarter, when compared to comparable risk placed in the first two quarter of 2009, has seen pricing come in as much as 300 basis points," added Halsband. (Editing by Andy Bruce) ((Click here to join the Thomson Reuters Insurance Linked Securities Community for more news and analysis: here)) ((sarah.hills@thomsonreuters.com, +44 207 542 9619))

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