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Cat bond activity spikes in 2006

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A record total of $4.69 billion in new catastrophe bonds were issued in 2006, a 136% increase from 2005's record performance of $1.99 billion, a study shows.

The report, produced by New York-based reinsurance intermediary Guy Carpenter & Co. L.L.C. and affiliate MMC Securities Corp., notes that 20 transactions were completed by 15 sponsors in 2006, double the 10 completed in 2005.

Christopher McGhee, MMC Securities managing director and head of Guy Carpenter's investment banking specialty practice, said in a statement that the growth in the 2006 cat bond market was driven by a tightening in capacity, increased costs in the traditional market and cat model changes, all of which were the result of the 2004 and 2005 storms.

"Given the lack of U.S. hurricane activity in 2006, it is unclear whether the market momentum will continue into 2007," he said. "What is clear, however, is that capital markets will continue to play an increasingly important role in risk transfer."

Since 1997, the first year in which multiple transactions occurred, 89 catastrophe bonds have been issued, with total risk limits of $15.35 billion.

At year end, there was $8.48 billion of bond principal outstanding, a 74% increase from 2005's year-end total of $4.9 billion.

According to the report, 2006 marked the first time that U.S. hurricane risk was the most securitized peril, accounting for $2.29 billion in risk capital, followed by U.S. earthquake at $2.23 billion.

In addition, Australian typhoon and earthquake, Mexican earthquake and U.S. tornado and hail were all securitized for the first time.

There was also an expansion of the risk profile of the catastrophe bond market, according to the report. While Standard & Poor's Corp.'s BB rating or equivalent remained the staple, there was also a notable increase in the number of B-rated and unrated issuances, and the first AA-rated catastrophe bond was issued as well.

The report also discussed the increase of securitization in nonbond form, including sidecars and industry loss warranties. According to the report, there were 11 sidecar transactions in 2006, which raised a total of $2.91 billion in debt and equity capital.

The report, "The Catastrophe Bond Market at Year-End 2006, Ripples into Waves," is available at www.guycarp.com.