Guy Carpenter expert predicts slowing down of cat bond and side car activity

Last year was a record year for cat bond activity, but Chris McGhee, managing director of Guy Carpenter’s investment banking specialty practice in New York, predicts that 2007 will see a slowing-down in both cat bond and side car activity.
McGhee, addressing the crowd at Guy Carpenter’s Property Specialty Seminar in Toronto, noted that in 2006 there were US$4.7 billion dollars in cat bonds issued and almost $3 billion in side car creations.
While capacity on the reinsurance market continues to expand, “I think the critical point here is that this convergence between the capital market and the reinsurance market, in my view, has actually already happened or is in the process of happening,” he said.
The rapidity of capital into the businesses increased dramatically, he continued, “but remember, it can also exit very quickly.”
The distinction between traditional and alternative markets continues to be less relevant, he noted.
“All of this is important to pay attention to, because the non-traditional markets of today are going to become the traditional markets of the future.”
And this, he continued, “will put a burden on everybody in that it means there are going to be more,” complex concepts for those in the industry to understand.
When considering the spike in cat bond activity in 2006, more than doubling that of 2005, he continued, it’s important to note that it is not a new market place.
“This has been going on a multi-issuance basis since 1997,” McGhee said. “It is a market that has been going slowly up, and then bang, after Katrina this was a vehicle that was well understood,” so people turned to it.
The activity of 2006 shows that “this market place can be extremely useful, very, very quickly,” much more so than in the past, he posits.
But, “we expect 2007 to be considerably less active than 2006, but still more active than the side car market.”